[Senate Hearing 107-1018]
[From the U.S. Government Publishing Office]
S. Hrg. 107-1018
THE ADMINISTRATION'S NATIONAL
MONEY LAUNDERING STRATEGY FOR 2002
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
THE COORDINATION AND THE FOCUS OF FEDERAL ANTI-MONEY
LAUNDERING PROGRAMS, ONE YEAR AFTER THE PASSAGE OF THE INTERNATIONAL
MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT OF 2001,
TITLE III OF THE USA PATRIOT ACT.
__________
OCTOBER 3, 2002
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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90-722 WASHINGTON : 2003
_____________________________________________________________________________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Linda L. Lord, Republican Staff Director
Steve Kroll, Senior Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
C O N T E N T S
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THURSDAY, OCTOBER 3, 2002
Page
Opening statement of Chairman Sarbanes........................... 1
Opening statements, comments, or prepared statements of:
Senator Enzi................................................. 3
Senator Stabenow............................................. 6
Prepared statement....................................... 36
Senator Carper............................................... 32
WITNESSES
Charles E. Grassley, a U.S. Senator from the State of Iowa....... 4
John F. Kerry, a U.S. Senator from the State of Massachusetts.... 36
Kenneth W. Dam, Deputy Secretary, U.S. Department of the Treasury 7
Prepared statement........................................... 38
Larry D. Thompson, Deputy Attorney General, U.S. Department of
Justice........................................................ 10
Prepared statement........................................... 61
Stuart E. Eizenstat, former Deputy Secretary, U.S. Department of
the
Treasury....................................................... 24
Prepared statement........................................... 65
Elisse B. Walter, Executive Vice President, Regulatory Policy and
Programs,
National Association of Securities Dealers..................... 27
Prepared statement........................................... 69
Alvin C. James, Jr., former Senior Money Laundering Policy
Advisor, U.S.
Department of the Treasury..................................... 28
Prepared statement........................................... 73
Additional Material Supplied for the Record
The 2002 National Money Laundering Strategy, dated July 2002..... 79
(iii)
THE ADMINISTRATION'S NATIONAL
MONEY LAUNDERING STRATEGY FOR 2002
----------
THURSDAY, OCTOBER 3, 2002
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:40 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. Let me call the hearing to order.
We are holding this hearing today to review the
Administration's 2002 National Money Laundering Strategy. This
Committee has devoted a great deal of time to the anti-money
laundering measures over the past year. In fact, a year ago
tomorrow, the Committee unanimously passed path-breaking
legislation that became Title III of the USA PATRIOT Act. We
held an oversight hearing on that legislation, January 29, and
we are holding a second oversight hearing today.
I am especially pleased that Senator Grassley is able to be
with us this morning. He has taken a strong role on this issue,
along with Senators John Kerry and Carl Levin. I have Senator
Kerry's statement which will be included in the record, and
Senator Levin has indicated that he intends to submit a
statement for the record.
Before I turn to Senator Grassley, I just want to say a
couple of words about the issue. During the last year, the
anti-money laundering agenda has been dominated by the
financial war on terrorism. The Federal Government has taken
unprecedented steps to lead international efforts to disrupt
and disarm international terrorist financing networks.
According to Deputy Secretary Dam, the United States and
other countries have frozen more than $112 million in assets
related to terrorist organizations. Treasury has also worked to
implement the various provisions of Title III of the USA
PATRIOT Act, a job that is not yet fully complete. It has
produced the necessary rules in a steady and timely sequence,
and while one may differ on occasion with some of the
substantive choices made, I do think that there has been a
committed effort to meet the statutory deadlines.
The short-term focus on clandestine financial movements
designed to fund terrorism is understandable in the
circumstances. But it should not detract attention from two
issues affecting the broader range of Government anti-money
laundering efforts.
The first issue is that we have not yet assigned
responsibility for the success or the failure of these efforts.
Working against money laundering means more than prosecuting
particular individuals. It means combining civil regulatory
criminal enforcement and diplomatic initiatives. And the
question is who is the responsible person if the necessary
combination does not occur?
The question is especially relevant to last year's
legislation, which dealt in large part with cross-border
transactions, especially international banking and money
movement.
Implementing regulations are written by the Department of
the Treasury. But the bank supervisory agencies, the SEC, and
now the CFTC, examine various classes of financial institutions
for compliance with the rules.
Although the IRS is supposed to examine a vast range of
nonbank institutions, including hawala money transmitters for
compliance, a reorganization of the revenue service has made it
difficult for it to find staff resources for such audits.
The Treasury retains ultimate authority to impose penalties
for noncompliance with the new rules. But the experience has
been that that job is usually left to the bank supervisors
under different authority.
The second issue is the Government's difficulty in
developing a fully coordinated approach to combat money
laundering as a separate crime, again, in part because no one
is responsible for doing so, or authorized to overcome
organizational resistance.
Now, central coordination I think has been in place to a
significant extent to deal with terrorist funding. But that
organization has not been duplicated to deal with narcotics-
based money laundering, or with problems associated with
correspondent banking and off-shore shell companies.
Some of the proposed transfers in the Homeland Security
legislation heighten these questions, particularly the transfer
of the Customs Service and the Secret Service. The Customs
Service has been a leader in money laundering investigations
and the Secret Service's expertise in dealing with credit card
crimes is increasingly relevant to money laundering cases.
There are also reports that indicate that the enforcement
arm of the Bureau of Alcohol, Tobacco, and Firearms, and
perhaps all or part of FinCEN, could also be moved, either to
the Department of Justice or the new Department of Homeland
Security, so that Treasury would have little or no law
enforcement capacity remaining outside of the Internal Revenue
Service.
The possibility of shifting these investigative resources
make it all the more important to examine how to centralize the
formation and coordination of all Federal anti-money laundering
efforts.
By bringing attention to these issues, I do not mean to
minimize the difficulties involved in carrying out a unified
anti-money laundering program. Money-laundering involves a
complex set of problems that cut across jurisdictional and
subject matter boundaries. But, we must face this challenge and
it is one of the things that we need to explore in this
hearing.
With that, I yield to Senator Enzi.
STATEMENT OF SENATOR MICHAEL B. ENZI
Senator Enzi. Thank you, Chairman Sarbanes. I appreciate
your willingness and diligence with this issue. I also want to
thank the witnesses who will be testifying today. This issue is
of the utmost importance and the timing of the hearing is
extremely important.
Since September 11, the Congress and the Administration
have worked in conjunction in an attempt to decide how to
defeat an evasive and deadly enemy. Terrorists and terrorist
organizations offer new threats to the security of the American
people and we have to do everything possible to defeat them.
I am proud to say that this Committee acted almost
immediately after the September 11 tragedy to explore avenues
to stop the financing of terrorism. Through bipartisan efforts
led by Chairman Sarbanes and Senator Gramm, and the efforts of
Senators Levin and Grassley, this Committee passed the
International Money Laundering Abatement and Financial Anti-
Terrorist Act of 2001. This legislation developed far-reaching
laws which will assist our local law enforcement community in
stopping funds from going to the enemy.
Many of the provisions included in the bill required
regulatory action by the Department of the Treasury and the
Department of Justice. Now, as these regs are written, it is
critically important that Congress remain aware of the
implementation and areas that we may need to readdress to
assist in the efforts to stop the flow of funds to these
organizations.
However, this is not just a domestic issue. Combatting
terrorist financing is a global issue which requires the
assistance of all our allies and, quite frankly, our allies are
happy to finally have us joining the battle.
Chairman Sarbanes and I have the privilege of being the
Congressional delegates to the United Nations. Chairman
Sarbanes has always conducted himself as a diplomat, and now he
actually has diplomatic status and rank.
[Laughter.]
In that capacity, he and I are able to witness the
coalition-building taking place on the international front. An
example of good work being done is the United Nations Security
Council Counter-terrorism Committee, or CTC. The CTC was
created by the Security Council Resolution 1373 after the
attacks of last September and with full support from the United
States.
With the exemplary leadership of Sir Jeremy Greenstock,
British Ambassador to the United Nations, the CTC has gathered
reports from over 170 individual nations. The Committee has
made suggestions on how these nations can continue to improve
their financial monitoring systems in the fight against
terrorism.
Although not all reports to the CTC have shown effective
action being made by nations, the knowledge garnered from the
international community can be used to find links between
charities, NGO's, and terrorist organizations.
I have had the opportunity to work with Ambassador
Greenstock and am very pleased with his leadership on the CTC.
I am also pleased to hear of his support for regional
organizations taking a larger role in the fight against
terrorism.
I am concerned, however, about the future of this work. The
information gathered has been remarkable. But now we are faced
with the question of what to do with it.
The CTC was not designed to take action, just to gather
information. It is up to the international community to
cooperate and use this information. When cooperation on money
laundering is not a high priority, the entire world is at risk.
It only takes one nation with lax laws to provide terrorists
and money launderers a safe place to hide.
Again, Mr. Chairman, I appreciate your holding this
hearing. I look forward to working with you and the other
Members and I look forward to the testimony of Senator
Grassley. He is always one of the best-prepared people,
particularly on issues that require a lot of detail. And that
is an unusual combination around here.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Enzi.
Senator Grassley, we would be happy to hear from you.
STATEMENT OF CHARLES E. GRASSLEY
A U.S. SENATOR FROM THE STATE OF IOWA
Senator Grassley. Thank you, Mr. Chairman, and Senator
Enzi, most importantly for the invite at a time when Congress
winds down. I think it shows on the part of you and your
Committee that this is a very important issue and that you
cannot let this issue drag or be unattended, or we are not
really going to get things done that need to be done.
In 1997, when I first started thinking about what would
eventually become the Money Laundering and Financial Crimes
Strategy Act, there were a couple of facts that I highlighted.
First, I believed then, and still do, that money laundering
poses a significant threat to our country. It undermines
legitimate financial transactions, promotes corruption, and
funds terrorism. It also allows profits from a plethora of
illicit transactions, from drugs to prostitution to gambling.
Second, it seemed to me at that time that to best respond
to this threat, we needed a comprehensive and coordinated
response. Coordinated not only between Federal law enforcement
agencies, but between regulators, industry experts, and
policymakers. And to accomplish this coordination, we would
need a plan.
Working with Representatives Velazquez and Leach, as well
as the former Chairman of this Committee, Senator D'Amato, we
agreed that the best way to encourage a comprehensive,
coordinated response to money laundering was to require the
development of a national strategy on money laundering. As a
model, we used Operation El Dorado, a joint venture between
Federal, State, and local law enforcement in New York City.
Operation El Dorado was able to identify and shut down money
laundering in a segment of the money transmitter industry. We
hoped that that strategy would take the lessons learned from
Operation El Dorado and apply them on the national level. But
it does not seem to have been duplicated elsewhere.
These elements of cooperation and coordination which made
the Strategy an important concept in 1998, make it essential
today. We know that money laundering is the functional
equivalent of a war industry for terrorist groups. More than
ever, I am convinced that we need a coherent, comprehensive
response on the issue. If we are going to ensure the legitimacy
and security of our financial system, while protecting the
privacy of investors, then everyone, from law enforcement to
bank regulators, need to understand the threat and what their
particular role is in addressing that threat. Difficult topics
or turf disagreements cannot be swept under the rug. And those
do exist.
Unfortunately, this latest strategy falls short of the
goal. I am disappointed to have come to this conclusion. But we
must think clearer about what can be done, and we must exercise
leadership and establish responsibility to ensure that it
happens.
This is not a criticism of current efforts. Most of the
efforts we are making, such as Treasury's Operation Green Quest
or the Terrorism Financing Review Group at Justice, are doing a
great job. I am confident Deputy Dam and Deputy Thompson will
give you a full report. But there are weaknesses that these
groups and others have identified in our financial system that
we need to address if we are going to make an effective
difference. And unfortunately, these weaknesses are not
discussed in this latest Money Laundering Strategy.
For example, Mr. Chairman, I am concerned that not enough
attention is being paid to the correspondent accounts U.S.
banks have established. While the USA PATRIOT Act moved the
ball significantly forward, it appears that greater steps
should be taken that may not be best accomplished with
additional legislation.
We know that even today, a satchel of thousands of U.S.
dollars can be taken to a foreign bank that is willing to
accept the deposit with no questions asked. The foreign bank,
through its correspon-
dent relationship with a U.S. bank, will provide either readily
negotiable U.S. dollar checks drawn on a U.S. bank or wire
transfers initiated by the U.S. bank in exchange for the cash.
These checks and wire transfers are drawn on the account of the
foreign bank with the U.S. bank, effectively hiding the source
of the funds.
And since no banker wants to hold excess currency, the
foreign banker, who does not have the option of sending his
excess dollars to the Federal Reserve Bank, deposits the
dollars in his U.S. cor-
respondent account. This is a gaping hole in our money
laundering net. It circumvents all the safety measures that the
legislation put in place--yet it is not discussed at all in
this Money Laundering Strategy. What we have instead is a
report on current activities. Only actions currently underway
are addressed, and potential new components which have been
discussed in the past--such as the report required in the 2001
Strategy on the roles lawyers and accountants play in money
laundering--are ignored.
I believe a strategy should not be a report card on what
has been done, but, instead, should provide a roadmap to where
we want to be tomorrow. It should identify threats and the
tools needed to address these threats. And it should provide
direction for the steps necessary to reach objectives. If we
are going to avoid duplication or inconsistent, ad hoc
responses to these new threats, then we need to develop a
clear, systematic approach to money laundering.
We have had such a document in the past. The 2000 Strategy
was a strategic document. The 1999 Strategy was as well,
although it wasn't released until the end of the year. But both
documents identified problems, and then listed specific steps
that would or should be taken to address these challenges. They
charged specific, individual offices with action items. And
each of us may have had some difficulties with where the
Strategy was taking us--but any good strategy will be
controversial. It laid out a coherent, compre-
hensive plan to deal with money laundering, nevertheless.
If we were going to address money laundering in a
coordinated and effective manner in the future, then we must
have a coherent plan of action. An effective strategy should be
released at the beginning of the year, before funding decisions
are made. By law, the 2003 Strategy is due February 1. It
should talk less of targeting the individuals who manipulate
the system, and more about how to make the methods that they
use no longer workable. And it should outline the steps
necessary to get from where we are today to where we want to
be.
I know that we can do better. I know that we have to do
better. And I hope that when the 2003 Strategy is released
early next year, it is. Thank you again for the invite. I look
forward to continuing to work with the Members of the
Committee, and particularly the Administration, on this
important issue.
Chairman Sarbanes. Thank you very much, Senator Grassley,
and thank you again for your constant efforts on this issue.
I do just want to underscore one point you made.
Of course, this Strategy came late. But the next report is
due in February of next year. I think the Committee should
obviously have a review of that report, which I hope will be on
time, or close to it, shortly after it is released, and we look
forward to again interacting with you in that regard.
I think your suggestion that in addition to reviewing what
has been done, which is always helpful, of course, as you look
to moving ahead, but I think you are right, we need to have a
strategic plan that focuses on other concerns as well.
So, as we move ahead, we are really getting a comprehensive
framework into place to deal with this issue. I think it is
extremely important. And I look forward to continue to work
with you in that regard.
Senator Grassley. If that Strategy is delivered timely, it
is going to come at the time that we develop the budget and
then for the hearings of the Subcommittees of Appropriations.
And if there is more money needed, it is going to be much more
easy if we have that Strategy plan with us at that time.
Chairman Sarbanes. I think that is an excellent point.
Senator Enzi.
Senator Enzi. I just want to thank Senator Grassley for the
excellent testimony and the ideas that he has here.
Chairman Sarbanes. Senator Stabenow, do you have any
questions of Senator Grassley?
COMMENTS OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman. Not a question,
but just to thank Senator Grassley for all of his work on this
issue.
Another issue Senator Grassley has raised and I have raised
on the Committee is the issue of concentration accounts. I know
that we have been jointly urging the Department to move forward
on rules related to concentration accounts, and I am interested
in what the Department has to say in terms of being updated
today.
But I appreciate your comments and share your concerns.
Senator Grassley. And maybe we should review our
coordinated effort on that to see if we need to take any
additional steps at this point.
Senator Stabenow. I agree. Thank you.
Chairman Sarbanes. Senator Grassley, we thank you very
much.
Senator Grassley. Thank you.
Chairman Sarbanes. We look forward to continuing to work
with you.
Senator Grassley. Thank you.
Chairman Sarbanes. If our next panel could come forward,
Deputy Secretary Dam and Deputy Attorney General Thompson.
Senator Stabenow, you have joined us since we made opening
statements. I would yield to you now if you have a statement
you might wish to make.
Senator Stabenow. I would just submit one for the record,
Mr. Chairman, and thank you again for this hearing. I am proud
of the work that we did last year and I know that this was the
focal point for really moving forward. I am anxious to hear
what the Department has to say as they have taken the
legislation that we worked on and passed last year.
Chairman Sarbanes. Yes. Well, I want to thank the Committee
Members for their commitment last fall when we took up this
issue. We had actually scheduled a hearing on money laundering
before September 11 happened. It was to occur about a week
later. So, we were turning our attention to that issue and
then, of course, September 11 occurred, which raised this to a
crisis matter. And we were able, by working very diligently
over a number of weeks last fall, to put together a good piece
of legislation that became one of the titles of the USA PATRIOT
Act.
Secretary Dam, I think we will go to you, and then to
Attorney General Thompson, unless you have worked out some
contrary arrangement amongst yourselves.
Mr. Dam. No, that would be fine.
Chairman Sarbanes. All right.
STATEMENT OF KENNETH W. DAM
DEPUTY SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Mr. Dam. Mr. Chairman and distinguished Members of this
Committee, I appreciate this invitation to testify. I have a
fairly lengthy prepared statement which I think will be
helpful, but I would just like to summarize it briefly and ask
that the full statement appear in the record.
Chairman Sarbanes. The full statement will be included in
the record and we appreciate the effort and care that went into
the preparation of the full statement.
Mr. Dam. Thank you, Chairman Sarbanes.
I will focus on three principle areas--our progress on the
financial front of the war on terrorism, the 2002 National
Money Laundering Strategy, and the implementation of the USA
PATRIOT Act.
Now with regard to the first principal area, the financial
front of the war on terror is critically important to America's
success in fighting terrorism. Our strategy is set forth in the
National Money Laundering Strategy as Goal 2. There, we make it
clear that we need a multifaceted strategy, which includes
intelligence gathering, freezing of suspect assets, law
enforcement actions, diplomatic efforts and outreach, smarter
regulatory scrutiny, outreach to the financial sector, and
capacity building for other governments and the financial
sector generally.
These efforts are having an impact. As you, Mr. Chairman
just pointed out in your opening statement, the United States
and other countries have frozen more than $112 million in
terrorist-related assets. But to see the full effect of the
action, you cannot just count the money that has been seized.
You also have to look at the flow of funds that has been
disrupted. And just to illustrate that, I want to take one
example. The al Barakat network, which is a worldwide network
which was, according to some estimates, channeling $15 to $20
million a year to al Qaeda. We have not only frozen the assets,
but we have also cut that flow, and it is the flow that is
critically important.
I wish to underscore the importance of the international
cooperation we have received. After all, you cannot bomb a
foreign bank account. So, we need the cooperation of other
governments in order to achieve our objectives. And since
September 11 of last year, we have obtained strong
international cooperation. All but a small handful of countries
have pledged support and over 160 countries actually have
blocking orders in force. Hundreds of accounts worth more than
$70 million have been blocked abroad, and foreign law
enforcement agencies have acted swiftly to shut down terrorist
financing networks. I have given you several examples in my
written testimony, but let me just refer as one example to last
month's joint action by the United States and Saudi Arabia to
refer to the U.N. Sanctions Committee a man named Wa'el Hamza
Julaidan, who was an associate of Osama bin Laden and a
supporter of al Qaeda terror. And of course, we also have
blocked any accounts.
Now, let me turn to the National Money Laundering Strategy
as a whole. It is a strategic document, not a report card. But
I can go into that at greater length. I would like to point out
now that this Strategy involves 26 different U.S. Federal
agencies, and they have all concurred in this Strategy. The
Strategy lays out six specific goals. And I would like to refer
to some specific aspects.
As I mentioned, of course, disrupting terrorist financing
is one of the major goals. But one of the things we have done
that is new here is to show our determination to measure
results. This is part of a general philosophy that is contained
in the President's Management Reform Agenda. But I do not think
I have to tell you that Secretary O'Neill, with his background
and his experience, is very much focused on the results. Inputs
are one thing, but results are another. And this strategy is
focused on measuring the effectiveness of our program.
The last two Strategies have been focused more, and
particularly 2002, on attacking large transnational,
professional money laundering organizations. And we highlight
this in our Goal 3. Now these kinds of cases, as opposed to
just picking up somebody on the street take time to develop.
But, nevertheless, we are having some early successes. And let
me just point out one illustration.
Earlier this year, the Customs agents in New Jersey
arrested an Assistant Vice President of a bank who was
operating an illegal money transmitting business that moved
approximately a half-billion dollars in 8 months. This
Assistant Vice President maintained over 250 accounts at the
bank, 44 of which were in the names of nonexistent companies
and people that were fronts for currency exchanges, or actually
firms, in Brazil. So this is an example of what you can
accomplish if you focus on a large organization.
Let me turn now to the USA PATRIOT Act.
Chairman Sarbanes. What happened to that fellow?
Mr. Dam. This has been dismantled and I will get you an
answer on exactly where the status of the case stands. Perhaps
Deputy Attorney General Thompson can provide that.
Chairman Sarbanes. All right. Well, I will defer and I wait
until the question period.
Mr. Dam. Thank you very much.
Turning to the implementation of the USA PATRIOT Act
itself, our major accomplishments over the past 11 months
include the following: Together with the Federal functional
regulators, we issued customer identification and verification
regulations. We have developed a proposed rule that seeks to
minimize the risks presented by correspondent banking and
private banking accounts. We expanded our basic anti-money
laundering program requirement to the major financial service
sectors, including insurance and unregistered investment
companies such as hedge funds.
Now all of this is spelled out in my written testimony, but
I grant you, we do have work to do. For example, I am not
satisfied with the pace of our deliberations over the first use
of the powers that you gave us in that Act under Section 311.
We can go into that later if you would like, but it does raise
some difficult legal and policy questions which our lawyers and
our administrators have been wrestling with. But I can assure
you that Treasury is working hard to invoke those powers and I
expect to do so quite soon.
Let me come to the conclusion.
These three aspects of our program which I have just
highlighted, the financial war, the Money Laundering Strategy,
and the USA PATRIOT Act, are all interrelated. As we move
forward on them together, I think we are making a difference.
Our combined efforts are making it increasingly more
difficult for terrorists to use the U.S. financial system. We
are disrupting the ability of terrorists to plan, operate, and
execute attacks. And we are forcing terrorists to use methods
such as bulk cash smuggling that hadn't been necessary before
to finance their operations. Now forcing terrorists to resort
to bulk cash smuggling has some benefits. Principally, I would
point to the fact that smuggling exposes both the courier and
the cash or other financial instruments to a greater risk of
detection and seizure by the authorities, and I want to give
you an illustration and some figures.
Since last September 11, Customs has seized over $9 million
in cash being smuggled out of the United States to Middle
Eastern destinations or with some other Middle Eastern
connection.
As an example of what has been accomplished beyond that,
this summer, Customs, Secret Service, and FBI agents
apprehended, and there was a subsequent indictment of
Jordanian-born Omar Shishani. This was in Detroit, where
Shishani came in on a flight, and because of the work that had
been done to get information systems to work together, we were
able to search and find that, contrary to his declaration, he
was actually smuggling in $12 million in forged cashier's
checks. So, he was vulnerable because he had to use this
device.
Now, I want to mention one other development. Just last
month, I announced that we were forming a USA PATRIOT Act Task
Force. And the purpose of that task force is to take a second
look at the regulations we promulgated over the last 11 months
and to ensure that they are doing a good job of disrupting
terrorist financing, and I might say also, doing a good job in
the money laundering aspects of terrorist financing and other
financing, and to do so in a way that imposes the least burden
necessary on the privacy interests of our citizens and our
financial sector.
It will be a group to address some of the kinds of
questions that have been raised, including the question that
Senator Grassley was raising about correspondent banking
relations--of U.S. financial institutions.
We look forward to working with you and your staffs on this
project and I would be pleased to take any questions you may
have.
Thank you very much.
Chairman Sarbanes. Thank you very much, Secretary Dam.
General Thompson, we would be happy to hear from you.
STATEMENT OF LARRY D. THOMPSON
DEPUTY ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE
Mr. Thompson. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Committee, I am pleased to
appear before the Committee this morning to discuss with you
issues related to money laundering, including the 2002 National
Money Laundering Strategy and our progress on the financial
front of our ongoing war on terrorism.
And I, too, like Deputy Secretary Dam, have a detailed
prepared statement, but would like to discuss with you this
morning in summary form with respect to issues in the prepared
statement, and some additional issues.
Chairman Sarbanes. The full statement will be included in
the record.
Mr. Thompson. Mr. Chairman, I appreciate your attention to
this important issue and your interest in the Administration's
ongoing efforts to refine our battle plan against domestic and
international money laundering.
Initially, I would like to thank the Members of this
Committee, as well as all the Members of Congress, for your
efforts in developing and in passing two landmark pieces of
legislation in prompt response to the threats that our Nation
has encountered over the past year. The USA PATRIOT Act, passed
in response to the horrible attacks of September 11, provided
those of us whose mission it is to protect the people of the
United States with a wide array of new measures that will serve
to enhance our ability to carry out this important work. The
Sarbanes-Oxley Act of 2002, passed in response to the threat to
our economic well-being posed by corporate criminals, was a
signal to those who seek to cheat hard-working Americans that
these kinds of actions will not be tolerated. You should be
proud of your accomplishments in passing these extraordinary
bills, and on behalf of the dedicated men and women in law
enforcement, we thank you for your efforts in this behalf.
Chairman Sarbanes. Thank you.
Mr. Thompson. The 2002 National Money Laundering Strategy
makes significant strides in advancing our battle plan against
money laundering and, in fact, addresses some formidable issues
head-on. In Goal 1, the Strategy confronts the issue of
defining the scope of the money laundering problem and the
development of measures of effectiveness, and Deputy Secretary
Dam addressed that in his opening statement. Goal 2 addresses
the critical issue of terrorist financing, and I will discuss
the Department's progress on this front in more detail later in
my summary testimony.
I would like to focus at this point on Goal 3, which
constitutes the core of the 2002 Strategy for purposes of law
enforcement. This Goal sets forth what the Department believes
are the major challenges in attacking money laundering. The
first objective of Goal 3 is to enhance our interagency
coordination of money laundering investigations. The first
priority in this regard is to establish an interagency
targeting team to identify money laundering related targets for
our priority enforcement actions. This interagency targeting
team has already been created and has met on several occasions.
The purpose of this group is to identify those organizations or
systems that constitute significant money laundering threats
and to target them for coordinated law enforcement action.
The second priority in Goal 3 is to create a uniform set of
undercover guidelines for Federal money laundering enforcement
operations. And our well-intended agents in the field are
sometimes limited in conducting joint undercover operations,
for example, because they must follow different agency
guidelines. If we can find ways to overcome these differences
or develop uniform guidelines that address the concerns and
priorities of all of the agencies, our efforts in conducting
these operations I believe will be significantly enhanced.
And the third priority of Goal 3 is to work with our 93
U.S. Attorneys' Offices to develop the Suspicious Activity
Reports (SAR) Review Teams, as we call them, where they do not
currently exist but could add value. These SAR Review Teams are
another vehicle for promoting interagency coordination. When an
interagency task force is created to review the SAR's in a
coordinated manner, the value of the SAR's is enhanced and
investigative priorities can be identified and better
coordinated. DOJ and Treasury are both promoting the value of
these SAR Review Teams to the investigators and prosecutors in
the field. And I am proud to say that, according to an Internal
Revenue Service survey of their SAR Review Teams, our U.S.
Attorneys' Offices participate in 37 of the 41 Teams that have
been established nationwide to date.
Objective 2 of Goal 3 focuses on the High-Risk Money
Laundering and Related Financial Crime Area, HIFCA Task Forces.
The HIFCA concept was another attempt to coordinate the
resources of all of the law enforcement and regulatory agencies
in a jurisdiction on the most significant money laundering
targets or threats in that particular region. Now, Mr.
Chairman, while a number of issues have hampered the HIFCA's
from reaching their true potential, the 2002 Strategy will have
DOJ and Treasury reviewing the HIFCA program and refining the
mission, composition and structure of the Task Forces so that
they can fulfill the mission that was intended for them.
With regard to Goal 2 of the Strategy, we have no greater
priority than the prevention of further terrorist attacks
against our citizens. We believe that the use of every tool in
our arsenal is necessary to do that, including terrorist
financing enforcement. And this is one of the focuses of this
Committee. If we can identify would-be terrorists through
financial techniques, or prosecute them for traditional
financial crimes, or target their supporters and operatives
with the crime of terrorist financing, we will be preventing
violent attacks that may otherwise occur.
The Department's terrorist financing enforcement efforts
are centered around two components the Attorney General
established in the aftermath of the September 11 attacks.
Within the Criminal Division, Mr. Chairman, we created the
DOJ Terrorist Financing Task Force, a specialized unit
consisting of experienced white-collar prosecutors drawn from
several U.S. Attorneys' Offices, the Tax Division, and some
litigating components of the Criminal Division. These are
Washington-based prosecutors and they work with their
colleagues around the country, using financial investigative
tools in an aggressive manner to disrupt groups and individuals
who represent terrorist threats.
In the field, the Attorney General created 93 Antiterrorism
Task Forces to integrate and coordinate antiterrorism
activities in each of the Federal judicial districts.
The criminal laws relating to terrorist financing are
powerful tools in enhancing our ability to insert law
enforcement into terrorist plots at the earliest possible stage
of their conspiratorial planning. For example, the statute that
makes it a crime for anyone subject to a U.S. jurisdiction to
provide anything of value, including their own efforts or
expertise, to organizations designated as ``foreign terrorist
organizations,'' was used recently in the Charlotte, North
Carolina Hezbollah case, the John Walker Lindh matter, the
recent New York indictment of supporters of Sheik Rahman, and
the actions that we took over the past few months in Seattle,
Detroit, and Buffalo. It is a powerful preventive tool.
The financial investigative tools at our disposal, which
have been refined over the years for use in combatting money
laundering, can also be employed in terrorist financing
enforcement. And to the extent that we succeed in raising the
global standards for money laundering prevention or enacting
tools that help our own efforts in this area, I believe we will
be enhancing the world's and our own ability to stop terrorist
financing. In this sense, terrorist prosecutors are using money
laundering as an important tool in these prosecutions. And
terrorism prosecutors and money laundering prosecutors are
beginning to share that same expertise, which I think is
important.
Now no discussion about money laundering would be complete
without a discussion about what we are trying to do with
respect to drug money and our efforts to stop it. No one can
tell us with any kind of certainty how much drug money is
laundered in our country. But we do know that users in the
United States spent at least $63 billion on drugs last year, an
astonishing sum. Now since assuming the Office of Deputy
Attorney General, I have made our Organized Crime Drug
Enforcement Task Forces the centerpiece of the Department's
effort to attack the supply side of the drug problem. The
Attorney General and I announced this past March a new strategy
to use OCDETF, as we call the Organized Crime Drug Enforcement
Task Forces, to go after the entrenched and significant drug
trafficking and drug money laundering groups. Integral in this
Strategy is the use of money laundering charges, financial
investigations, and forfeiture. In fact, Mr. Chairman, our new
guidelines issues to the U.S. Attorneys now require that each
OCDETF investigation must contain a financial component, and
that the results of those investigations must be documented.
And I can assure you that we will be closely reviewing the
results of these investigations in order to use our scarce
resources in the most effective way possible. We are trying to
take the money away from these organizations in order to
completely dismantle their illegal structure and prevent them
from doing what they have been doing in the past.
In conclusion, I would like to express the appreciation of
the Department of Justice for the continuing support that this
Committee has demonstrated for the Administration's anti-money
laundering enforcement efforts.
Mr. Chairman and Members of the Committee, thank you for
this opportunity to appear before you this morning. I look
forward to working with you as we continue the war against
terrorist financing and all forms of money laundering, and to
refine our Strategy to address these serious threats. I would
be happy to try to answer any questions that Members of the
Committee may have.
Thank you.
Chairman Sarbanes. Thank you very much.
Secretary Dam, I wanted to pick up on the reference to
Section 311 and focus attention on that.
We provided in Section 311, authority to the Secretary of
the Treasury to impose five special measures against foreign
jurisdictions, foreign financial institutions, or transactions
involving such jurisdictions or institutions that were
determined to pose a primary money laundering concern to the
United States.
The special measures were pretty encompassing, I thought,
requiring additional recordkeeping or reporting, requiring the
identification of the foreign beneficial owners of certain
accounts at U.S. financial institutions, requiring the
identification of customers of a foreign bank who use an
interbank payable through an account opened by that foreign
bank at a U.S. bank, requiring the identification of customers
of a foreign bank who use an interbank correspondent account
opened by that foreign bank at a U.S. bank, and restricting or
prohibiting the opening or maintaining of certain interbank
correspondent or payable through accounts.
Now these are pretty extensive authorities. But it is my
understanding that you have yet to use this authority. Is that
correct?
Mr. Dam. That is correct, Senator.
Chairman Sarbanes. What is the problem?
Mr. Dam. I am going to answer that. But can I first answer
your earlier question about the New Jersey case, just because I
think it is very important?
Chairman Sarbanes. Yes.
Mr. Dam. Criminal charges have been filed against the
senior executive of the bank whom I mentioned, and there is a
general investigation trying to develop all of the facets of
the case before proceeding further. We have seized many of the
accounts that were involved and we will be glad to give you a
detailed written response beyond these simple points that I
have made.
I would also like to say that in the 2002 Strategy
document, there is an Appendix 7, that is at page A-14 of the
Appendix, which lists quite a number of major cases that had
been developed in 2001 and 2002 before we were able to publish
it in July.
I think that illustrates what is possible if you focus on
the big networks because most of these are cases involving
major firms or major networks. So, that is one of the emphases,
I guess I should say, in this strategy. We want to push in that
direction.
Chairman Sarbanes. Let me just follow up.
What happened to the supervisors of that bank vice
president? Are they being punished in any way? Obviously, there
must have been some breakdown in supervision.
Mr. Dam. I agree with you. And I think that is what the
broader investigation is designed to get at. But I will include
that in the response and we will get that to you quite
promptly.
Chairman Sarbanes. Thank you.
Mr. Dam. With regard to your question about Section 311,
now I too have been wondering why we have not gone forward yet,
and I am a little impatient on that score, as I suspect that
you are.
Actually, there are some factors to bear in mind. One of
them is, this is a terrific set of empowerments of measures
that we can impose. But, because they are so far-reaching, they
have some substantial due process and procedural concerns that
have been raised. And you know, we try to be very careful and
not overreach, particularly when we get into areas such as due
process. So that is one factor that has been brought to my
attention.
The second one is evidentiary. We believe that we have to
develop a record that will stand up if there is a case brought
to set aside any measure that we impose. It is like terrorist
financing in that regard, although in terrorist financing, we
do have certain rights given to us in the USA PATRIOT Act to
present the classified evidence in camera to the judge. And my
impression is, and I believe I am correct on this, that that
power does not extend to Section 311 measures. So, we are
trying to be sure that we have a good record before we use
this.
There is one other factor to bear in mind when it goes to
the question of imposing Section 311 measures on a country. You
can do it against a foreign jurisdiction, against institutions,
and so forth. However, when you are thinking about countries,
one of the important points here is that we want to get
compliance with money laundering procedures, compliance with
the FATF 40 recommendations, and imposing sanctions may be
counterproductive to achieve that goal.
In fact, we have a good record, I think, through the FATF
in making progress with foreign jurisdictions and in nearly
every case, countries have made progress and many of them are
getting off the FATF list, and more will be taken off the FATF
list when the plenary meeting occurs just next week. I would
say that we are making good progress in bringing foreign
countries along.
I think that you need to think of the 311 measure there
like the club that we keep in the closet, rather than as the
objective of the measure being actually to use that power.
Those are some of the considerations. But I want to
underscore the fact that I, too, am very interested in why we
have not been able to use those powers yet.
Chairman Sarbanes. Well, of course, if you keep the club in
the closet all the time, eventually, people come to think that
you are not going to use it. So you need to try to focus on its
use, at least in some instances, to send the message that in
fact it can be used and you get the deterrent effect of that.
Your point on foreign jurisdictions is one that needs to be
carefully thought through. But you can act against a foreign
financial institution and you can also act against transactions
involving certain accounts. And it would seem to me that, in
looking over the landscape, you can pick out a couple of
instances that really would lend themselves to the invocation
of Section 311, so people know that this club is not only
there, but also on occasion, it will be used. Otherwise, I
think that they eventually reach the conclusion that there is
no backup here.
Mr. Dam. I agree with you, Mr. Chairman.
Chairman Sarbanes. Yes. My time has expired. I yield to
Senator Stabenow.
Senator Stabenow. Well, thank you, Mr. Chairman. I
appreciate the testimony of both of our distinguished
witnesses.
I would like to refer to a letter and ask Mr. Dam if you
can respond, and both of you are certainly welcomed to make
responses as it relates to the use of concentration accounts.
There was a letter that was sent back on January 11 of this
year, by Senator Grassley, Senator Carl Levin, and myself and I
would appreciate knowing what has happened since that time. I
do not believe we have had a written follow up to that.
But Section 325, which I advocated that we place into the
bill that we passed, explicitly authorizes the Treasury
Secretary to prescribe regulations to close an existing
loophole in the regulations governing how U.S. financial
institutions operate their internal administrative financial
accounts, often called concentration omnibus, or suspense
accounts. We know that dollars that come into an account when
that is used, as you know, they are pooled. The concern is that
it breaks the audit trail. It is difficult to track the dollars
coming out to specific accounts.
I know, in the past, probably the most notorious case was a
money laundering case regarding drugs with Raoul Salinas and
what happened back in the 1990's.
But I am concerned at this point that we should be moving
forward to focus on these accounts and draw upon the statement
that the Federal Reserve issued actually back in July 1997, in
their sound practices paper on private banking.
And again, I would just read this and then ask you to
comment and also what in fact, if anything at this point, has
been done to focus on concentration accounts.
However, the Federal Reserve back in 1997 issued a warning.
Unfortunately, it was only to U.S. private banks and not all
institutions. It was a guideline, not a binding regulation.
They did say at the time that private banking operations
should have the policies and controls in place to confirm that
a client's funds flow into and out of the client's accounts and
not through any other accounts, such as an organization's
suspense, omnibus or concentration accounts.
Generally, it is inadvisable from a risk management and
control perspective for institutions to allow their clients to
direct transactions through these other accounts. Such
practices effectively prevent association of the client's name
and account numbers with specific account activity, could
easily mask unusual transactions and flows, the monitoring of
which is essential to the sound risk management in private
banking and could easily be abused.
In the context of the debate in the Committee a year ago, I
had raised this, as did Senator Grassley and Senator Levin. We
did place a requirement to move forward on regulations and we
are very anxious to know if the Department has begun moving in
that direction.
Mr. Dam. Thank you, Senator. Yes, I know about your
interest in this subject. And let me say that we are moving
forward on Section 325. We have formed an interagency working
group that has been meeting and considering what types of
controls should be imposed. One thing that has become clear is
that many of the abuses that we are talking about here are
violations of existing rules and are being dealt with under
those rules.
But we, frankly, have been very concerned with meeting the
deadlines, which are quite good deadlines and have forced an
enormous amount of work with regard to other provisions which
have specific near-term deadlines, and we have issued quite a
long group of very voluminous regulations, rules, and that
takes time. And I would just like to explain why it takes time
to do that.
We have a very extensive process of consultation with the
financial institutions involved. After all, these rules and
regulations we promulgate have to be workable. And they work
best when the financial institutions feel that they are
reasonable and do not impose undue burdens on them.
That does not mean we are soft, but it does mean that we go
through this extensive consultation process. I know from
personal experience that we have gotten very favorable feedback
from our major financial institutions because of that. But in
any event, we are continuing to work on the subject of
concentration accounts.
Now with regard to the letter you read, private banking is
often a term used to refer to two things. You could have a
major commercial bank which had private account managers. These
are large accounts and so forth. And there, the commercial
banks are already subject to important regulations.
The concentration account provisions of 325 will
undoubtedly bear on them, too. There are also private banks,
like hedge funds and so forth, and they are now subject to
regulations we promulgated--I believe they are proposed at this
point. But, nevertheless, the hedge funds know what they have
to do, which requires them to put in place something that they
never had to have before, which was money laundering programs.
And not only that. Since they are private banks and they
are not subject to normal Federal regulation, they now have to
register with FinCEN, so that we know who they are and we will
be able to follow up. So, we are moving against that target as
well.
Senator Stabenow. I appreciate that and I think it is
obviously important to work with the industry, so that whatever
is done is workable.
My question would be, though, do you believe that this, in
fact, is an issue, a loophole that concentration accounts are
accounts that can and have been abused and will be a focus of
your efforts, along with the other issues that you are
addressing?
Mr. Dam. I will give you a personal opinion. If we could, I
would like to give you a written response in general to what we
are finding in the working group. However I will say that the
Congress and you have identified this as a problem. You have
given us the authority. We plan to use the authority. And we
need to come out with rules that implement Section 325.
Senator Stabenow. We would very much appreciate knowing an
update from you on what is happening and where it fits into
your priority list. And it looks like by not putting a deadline
in there, next time we will put a date in, with all the other
dates that were put in the bill. I realize that you have a lot
to do and have been working diligently. But this is an issue
that has come to my attention a number of different ways.
I would be curious, Mr. Thompson, and I can see my time is
up, but I do not know if you have anything to add. If you had
situations occur where the use of concentration accounts,
pooling of funds, and the loss of audit trails because funds
are designated to a specific account, whether that has been an
issue?
Mr. Thompson. Well, in addition to the efforts that the
Treasury Department is making in terms of defining the nature
of this problem, as I mentioned in my testimony, Senator, we
are establishing these targeting teams across interagency, in
connection with the interagency process.
I do not have any personal knowledge with respect to these
concentration accounts and how they are being used, for
example, in illegal narcotics trafficking, but I would like to
look at that and also at how we are targeting systems, as well
as just targeting organizations and leaders. We are targeting
systems. This looks like the kind of thing that we need to take
a look at, especially as it relates to drug enforcement. And I
would be pleased to get back to you on that.
Senator Stabenow. Thank you.
Mr. Thompson. Because as I was listening to your exchange
with the Deputy Secretary, I do see how it could be applicable
to our drug enforcement efforts.
Senator Stabenow. Absolutely. Thank you. I would appreciate
it if you could get back to us on what you are doing or how
much you think that this is an issue.
Thank you, Mr. Chairman.
Chairman Sarbanes. I think that this is a very important
line of questioning that Senator Stabenow has been following.
Secretary Dam, we appreciate that the Treasury had a heavy
burden imposed upon them in terms of developing regulations to
carry out the anti-money laundering legislation. As Senator
Stabenow notes, we did not have a deadline on these
regulations, although we had them in many other areas. I think
you are close to completing that process, most of your rules
and regulations. I think there are only a couple of projects
left.
So, I would anticipate that before the end of the year, you
will be there. And therefore, I think that the next hearing
that we would be thinking of holding would be fairly early in
the new year, after we get the strategic plan, which is due the
first of February. Then you would have an opportunity to have
put all your rules and regulations into place and we could take
a good view of the landscape and where things are. We have to
keep at this and we must not lapse back.
I want to ask General Thompson, immediately after September
11, there were a number of press reports about alleged
suspicious trading activity in the European markets, which
suggested that people with advanced knowledge or associated
with those attacks had sought to profit by taking short
positions in the airline and insurance markets in the weeks
leading up to the attack. At the time, the Justice Department
indicated that they would investigate that matter. What can you
tell us about where that matter stands?
Mr. Thompson. Senator, I am aware of those instances that
you are talking about. But as I sit here this morning, I am
really not in a position to specifically respond to exactly
where those investigations are. I will be happy to give you a
written response.
Chairman Sarbanes. But there are investigations underway.
Is that correct?
Mr. Thompson. I do not know.
Mr. Dam. Senator, may I respond to that question?
The only investigation that I am aware of was done by the
Securities and Exchange Commission. And my understanding of
their finding is that they did not find specific credible
evidence to support that newspaper story or those newspaper
stories. But if we have anything more on it, we will certainly
provide it to you.
Chairman Sarbanes. My understanding is that inquiries to
the SEC have resulted in the response that the Justice
Department is the lead agency on that matter.
Mr. Dam. Those may both be true, Senator. I just do not
know. We will have to get back to you on that.
Chairman Sarbanes. All right.
General Thompson.
Mr. Thompson. I am aware of one investigation and
prosecution in the domestic area in which a person who was
employed by the Federal Bureau of Investigation was charged
with using some improper information as it related to those
events. But I just do not know where we stand with respect to
any other investigation.
Chairman Sarbanes. How is this reorganization going to
impact our efforts in this arena, as it relates to the
Department of Homeland Security? I have great difficulty in
seeing how all this is going to work.
The Treasury is going to continue to be the responsible
agency for promulgating these regulations, but you are not
going to have any enforcement backup. Is that correct?
Mr. Dam. Well, Senator, I heard what you said earlier about
that. I do not believe that it has to unfavorably impact
efforts in this area.
You mentioned that perhaps part of FinCEN would go to
Homeland Security. Unless the Congress so determines, I do not
believe that would happen. It is certainly not anything that is
proposed by the Administration. It is the first that I have
actually heard of it and it strikes me as questionable to do
that because the fact of the matter is that the great strength
of the Treasury in this respect, and of FinCEN, is the contact
with the financial community.
That is a set of relationships that have been built up by
many Administrations over a long period of time. We really need
the cooperation of the financial community. It is not
fundamentally a prosecutorial activity or even a law-
enforcement activity. It is a set of arrangements whereby, to
be sure, with the force of law, they are required to file
reports and do certain things more and more now with the USA
PATRIOT Act. But for this to work smoothly and quickly, it is
very important to get real buy-in from the financial community.
And not just commercial banks, but the broker-dealers,
insurance companies, and so on.
So it seems to me that that strength will remain in
Treasury. What is moving out of Treasury under the Homeland
Security proposal is Customs and Secret Service. I do not want
to get into a debate about whether they are to remain integral
or not, but they will move as a body into Homeland Security and
presumably, they will continue to participate in the way they
do now in all of these activities. They will be part of the
working groups and so forth. I do not think that has to be the
result.
Another very important point here is that the Internal
Revenue Service, Criminal Investigative Service, is extremely
important in money laundering activities, as perhaps Deputy
Attorney General Thompson can testify even more than I can,
because he has had actual experience of cases where they have
been involved. And they remain very much in Treasury. They are
excellent forensic accountants who can really go into these
complicated cases.
Chairman Sarbanes. They are short-changed, though, on
personnel, aren't they, in a serious way to deal with this
matter?
Mr. Dam. That is an interesting question. I do not want to
express a personal opinion because I have not done the
personnel investigation that would be necessary. There is a
great demand for their services, I will tell you that, because
there is something called the Webster Commission Report, with
Bill Webster, who was head of the FBI and head of the CIA. His
report says that they should all be devoted to tax matters. And
there are other people who say, well, we need more of them in
the money laundering area.
I think we have worked out a good accommodation and I am
sure with more money, there could be more of these people hired
and make a contribution. But it is like everything else, it is
a trade-off of scarce resources with many tasks.
Chairman Sarbanes. I always thought that the extra money
that was required to enhance the IRS's capabilities in these
two areas you mentioned more than paid for itself in terms of
the results they produce. Isn't that correct?
Mr. Dam. That is probably correct. But you know, that is
probably like many things the IRS does. So that is always an
argument for giving the IRS more money, although their
resources have been not necessarily increased.
We do have an arrangement--just so I am not misunderstood--
a large number of IRS-CI employees are devoted right now to the
drug problem in OCDETF and so forth. And as I say, the whole
responsibility and leadership there is Mr. Thompson. He knows
more about that than I do and perhaps he can shed light on it.
Mr. Thompson. Senator, as I mentioned earlier, the
Department is concerned about money laundering and using the
really great and powerful money laundering tools in a number of
law enforcement actions, and not just in our antiterrorism
work, but in other kinds of law enforcement.
Chairman Sarbanes. Now, do you have these task forces that
you talked about, that you said were antiterrorism, do they
also exist to deal with other forms of money laundering, or
only in the terrorism field?
Mr. Thompson. No, they also exist to deal with other forms
of money laundering, Senator.
For example, I mentioned our Organized Crime Drug
Enforcement Task Forces, which is very important in order for
us to get at the supply side of the drug enforcement problem.
And that is, to identify the leaders of drug-trafficking
organizations, identify the significant organizational
structures in those criminal activities, and to dismantle them.
The only way to do that, and the only way to get at dismantling
those organizations is through asset forfeitures, through money
laundering charges.
The IRS has been a very important participant in the past
in that program. In 1990, we had, I believe, over 850 IRS
agents assigned to our very important work in that program.
They participated in 69 percent of our OCDETF investigations.
This year, we are down to 450 agents and only 38 percent of our
OCDETF investigations. And what we have done in trying to
retool this effort in our OCDETF and drug enforcement efforts
is to make certain that we do not lose sight of how important
and how essential it is to have financial investigations along
with all of these significant drug enforcement investigations.
But getting to your question to the Deputy Secretary with
respect to what is going to happen to our money laundering
efforts if the new Department of Homeland Security is created
as we expect it to be, we believe that because of the
Department of Justice's expertise in a number of these areas,
and because of our resources, we would be in a position to
assume a greater leadership role in these money laundering
efforts, working with our colleagues at Treasury.
I agree with Deputy Secretary Dam that Treasury will need
to continue a very important role in these efforts because of
their relationships with banks and financial institutions. But
we do believe from a law enforcement standpoint that the
expertise and the resources of the Department of Justice would
make the Department uniquely suited to take a greater
leadership role in what we are doing in our money laundering
law enforcement efforts.
Chairman Sarbanes. Has the Department reviewed the
legislation with an idea of coming to the Congress for any
changes or any additions that it may needed made in order to
enhance its capabilities to deal with this problem?
Mr. Thompson. I know that with respect to the Department of
Homeland Security, Senator----
Chairman Sarbanes. No, no. I mean with respect to the anti-
money laundering title that we passed last year.
Mr. Thompson. Let me just address the resource issue.
I know that we are seeking to reprogram our OCDETF efforts
to provide additional monies or additional focus for training,
joint training of FBI and DEA agents. And we are seeking to
reprogram our efforts to provide the establishment of a special
task force to investigate money laundering havens.
As I see what we are trying to do, we need the resources to
be able to use the very powerful tools that you have given us
so that we can better do drug enforcement efforts and our law
enforcement efforts as it relates to corporate fraud.
I think that is an important part of our analysis of this
legislation and our efforts in terms of how we can do our jobs
better.
Chairman Sarbanes. Yes, I think that is a valid point. But
I still want to come back to the question, which is whether, in
reviewing the statute that was put into place, you feel that
there are changes that should be made that would enhance your
abilities to address this problem?
Mr. Thompson. I am not aware of specifically what we have
done along those lines, Senator.
Chairman Sarbanes. Well, maybe both the DOJ and Treasury
could undertake to do that. But at the time we hold our next
hearing on this issue, which I would anticipate sometime in the
early part of the next year, we would have a chance to get the
benefit of any recommendation.
Did you want to speak to that, Secretary Dam?
Mr. Dam. Well, I just wanted to say, Mr. Chairman, that was
one of the motivations in creating this internal Treasury Task
Force. And it will work with other departments and agencies and
with the private sector to see if additional legislation is
necessary.
Now it might in some cases be to reduce authorities if they
are creating a problem. But more likely, it will be to fill in
gaps.
We certainly will have in mind the timetable that you
mentioned and be able to express an opinion at that time as to
whether additional authority or some other kind of change is
required in the legislation, and we will work with Justice.
Chairman Sarbanes. When we have passed the point where
people can say, well, we are still baking the cake because we
do not have all the rules and regulations in place yet, or we
are still baking the cake because we haven't figured out how we
are going to do all the allocation of resources and so forth.
We are beyond that point and we are now, in a sense, moving
ahead. Then we need to look to see what else needs to be done
to bolster this effort. And then, of course, carefully examine
what the results of the effort are.
As I indicated in my opening statement, I do think we face
some difficult questions on coordination. Of course, Senator
Grassley was very strong on the point of great strategic
thinking as we go into the future.
So, I think I just should leave that charge with you as we
think of the early part of next year. As we get the next Money
Laundering Strategy report, as Senator Grassley pointed out, we
will be in the budget process, so there may be efforts to bring
about important change, although you can do that now as the
budget is being put together, rather than us trying to do it
later when the budget comes to us. And I encourage you in that
regard.
Mr. Dam. Could I respond to one aspect of what you just
said?
I thought that, in general, Senator Grassley made a very
fine statement. But I do find the last three or four paragraphs
a little misleading, perhaps, because in talking about the need
for strategy and knowing who does what and when, I think that
is exactly what is different about the new Money Laundering
Strategy from the past. The past was very much focused on how
can we spend more money on this problem, rather than what
specifically do we have to do. And you will notice if you look
through the actual document, that for each and every priority,
and there are many, there is a specific statement of who is
responsible and a specific statement of what was accomplished
in 2001 and what was accomplished in 2002.
If you have a copy, for example, I could point to page 11,
Priority 3, which has to do with going out and seizing the
money. Who has the lead?
Well, the lead is shared between Justice and Treasury and
there is a very specific person in the Treasury, the Director
of the Executive Office of Asset Forfeiture, and in Justice,
the Chief of the Asset Forfeiture and Money Laundering section
who is responsible.
In 2001, for the very first time, the two Departments
actually established a definition of what is money laundering,
so that they could actually figure out what they had done in
seizures because there are other kinds of seizures that are not
money laundering seizures. For 2002, we are establishing a
reporting system, so we actually know what we are accomplishing
in taking the money away from the money launderers.
So it seems to me that that is exactly the kind of thing
Senator Grassley is calling for and I think it is here. I agree
that it was not present in the past to nearly the same extent.
I think you will find that for each and every priority, we have
indicated who is in the lead and what they are going to do in
2002.
Now will they accomplish it all? I do not know. But it is
not because they do not know what they are supposed to do to
carry out the Strategy.
Chairman Sarbanes. How often do you and General Thompson
meet on this question of the Money Laundering Strategy?
Mr. Dam. Well, in principle, we meet every month. I have to
say that is not always true. We also talk to each other a great
deal.
Chairman Sarbanes. You meet every month on this issue?
Mr. Dam. Or whatever issues are open. And often it is money
laundering questions we have had quite a number of
conversations about the allocation of the IRS agents, for
example, of how we can fund more agents because Justice finds
them extremely useful.
Chairman Sarbanes. Can one say that the Deputy Secretary of
the Treasury and the Deputy Attorney General meet monthly to
coordinate and examine the Money Laundering Strategy?
Mr. Dam. I wouldn't go quite that far, not that maybe that
is not a good idea and maybe we should do that, but we do in
principle try to meet every month to go over all of the open
items between Treasury and Justice.
Chairman Sarbanes. Now do the Secretary and the Attorney
General ever meet on this question?
Mr. Dam. I cannot answer that question. I know they meet.
But I cannot answer that question.
One of the things that I hope this new Treasury Task Force
will do is reach out specifically to Justice, but also all the
other non-Treasury agencies, bureaus, and departments in order
to be sure that we are on track.
I know that there are a lot of working groups working every
week on these tasks that are laid out, one of which I just
referred to, like the reporting system on seizures. And at that
level, we meet constantly.
Chairman Sarbanes. Gentlemen, thank you very much.
It has been a very helpful panel and presumably, we will
see you not too far into the new year to review once again
where we are. And hopefully, at that point, to have gotten
under our belt a lot of the start-up aspects of this effort,
which we are still engaged in.
Thank you for coming and being with us.
Mr. Dam. Thank you, Mr. Chairman.
Mr. Thompson. Thank you, sir.
Chairman Sarbanes.
We will now call the next panel. We are very pleased to
have this panel with us.
Stuart Eizenstat, now a partner at Covington & Burling, but
with a very long and distinguished career in public service and
a great familiarity with the issues we are dealing with. He, in
fact, served as Deputy Secretary of the Treasury in the
previous Administration and was the lead official on anti-money
laundering initiatives and was also our Ambassador to the
European Union in 1993 to 1996.
Elisse Walter is the Executive Vice President for
Regulatory Policy and Programs at the National Association of
Securities Dealers. She has held senior positions at both the
SEC and the CFTC. In her current position at the NASD, she
oversees the operating legal and policy activities for the
securities industry and is responsible, as I understand it, for
monitoring the steps the securities industry is taking to
create anti-money laundering and reporting programs pursuant to
the legislation.
Alvin James, a Principal at Ernst & Young, has much
expertise in investigating money laundering schemes,
particularly the Colombian Black Market Peso Exchange. He has
been a Senior Money Laundering Policy Advisor to the Financial
Crimes Enforcement Network and a Special Agent in the IRS
Criminal Investigation Division.
We are very pleased to have this panel here.
Secretary Eizenstat, why don't we start with you? Then we
will go to Ms. Walter and we will close out the panel with Mr.
James.
STATEMENT OF STUART E. EIZENSTAT
FORMER DEPUTY SECRETARY
U.S. DEPARTMENT OF THE TREASURY
Mr. Eizenstat. Thank you, Mr. Chairman. I appreciate your
continued leadership on this issue because effectively dealing
with money laundering is not only essential to dealing with
narcotics trafficking, organized crime, and corruption abroad,
but also with terrorism financing and therefore, national
security directly as well.
The Bush Administration has made important advances in
dealing with money laundering and antiterrorism funding. Some
terrorist funds have been frozen. Organizations and individuals
have been designated under IEEPA, and our allies have helped
block their accounts. But the Bush Administration has barely
scraped the surface of what needs to be done. There is no
genuine strategy to attack money laundering and money
launderers. IEEPA designations have become less frequent.
Our Government is still not properly structured internally
to focus priority attention on terrorist financing. There is no
existing international entity to work exclusively on locating
and blocking terrorist money. And we have not put the kind of
pressure we have to convince nations in the Middle East and
Persian Gulf, who are the principal locations and transit
points for terrorist financing, to bring their laws and
practices on money laundering and the tracking of terrorist
money up to international standards. Until these steps are
taken to shut down the financial sources of terrorism, our
Nation will remain vulnerable.
We have disrupted, but we are a long way from dismantling,
al Qaeda's financial network. During the Clinton Administration
we established that the bulk of al Qaeda's wealth did not come
from Osama bin Laden's inherited personal fortune, but rather
from multiple sources and was distributed through multiple
sources. This money comes from both businesses cloaked with the
mantle of legitimacy and from criminal activities, from petty
crimes to the heroin trade in Afghanistan. But its principal
source of money, Mr. Chairman, comes from its fundraising
activities through ``charities,'' mosques, financial
intermediaries, and financial institutions. Charities and
individuals in Saudi Arabia have been the most important source
of funding. In our Clinton Administration, two missions were
sent to the Gulf and Saudi Arabia to enlist their support in
shutting down these charities and dealing with these
individuals, but we received virtually no cooperation.
Let me suggest the outlines of a strategy. First, on the
U.S. Government side, we have to more effectively coordinate
the several branches of our Government working on this issue.
The Interagency Policy Coordination Committee on Terrorist
Financing, chaired by the General Counsel of Treasury has made
strides in this direction, but it is neither institutionalized
nor possesses clear lines of authority. We must have a high
level coordinator within the U.S. Government that has the
President's ear to coordinate the diplomatic law enforcement
and regulatory activities of our Government and focus our
Government's attention on terrorist financing on a continuous
and sustained basis.
Second, we must ensure greater attention at the
international level to the problem of money laundering in
general, and terrorist funding in particular.
The Financial Action Task Force, FATF, has done a good job
of placing an international spotlight on those countries which
do not meet international standards in dealing with money
laundering, and thus, can be misused by terrorist groups to
launder their money. During the Clinton Administration, we
began important elements of a dual track policy of both
tracking terrorist funds and working to upgrade international
money laundering strategies and standards. Fifteen nations were
cited as being noncooperative in the international fight
against money laundering in 2000, and we followed up those FATF
actions, Mr. Chairman, with our own hard-hitting advisories to
U.S. financial institutions, recommending enhanced scrutiny
against potential money laundering transactions involving those
countries. The reaction was positive. Bahrain, UAE, and Egypt
passed anti-money laundering laws. Panama, Israel, and
Liechtenstein took important steps to bring their laws up to
international standards and were removed from the list.
But, frankly, this important initiative seems to have hit a
snag. I am very concerned that the Bush Administration may be
retreating from the strong effort to identify noncooperating
countries. Only last week, it was reported that FATF was
planning to agree to suspend for at least 1 year its practice
of identifying noncooperating countries. This, Mr. Chairman,
would be a serious mistake. The plan to abandon the
blacklisting practice somehow contemplates in its place an
increased role by the IMF and the World Bank. But these are not
contrary to each other. Indeed, hopefully, the Administration
will continue to publicize noncomplying nations through the
FATF process, while also encouraging a greater role for the IMF
and World Bank.
FATF is only part of the solution. There is no
international organization dedicated solely to tracking
terrorist funds. We should work with our G7 and G8 partners to
create such an organization, working in parallel to FATF. The
Greenberg Task Force on the Council on Foreign Relations
dealing with terrorist financing, of which I am a member, will
have detailed recommendations here and in terms of our
international organization, by the end of the month.
It is critical to establish international standards through
this new organization to regulate charitable organizations, put
money laundering on the agenda of major international fora, and
set international standards to regulate hawalas.
The Administration needs to place the issue of terrorist
funding on the regular agenda of every major international
event--APEC, ASEAN, and the twice annual EU-U.S. Summits. With
regard to the EU, unless our EU allies and their banking
systems employ the same approach as we have, and maintain the
degree of political commitment necessary to achieve financial
transparency, then the value of our Government's work with our
own financial institutions will be greatly reduced.
The EU countries have taken some positive steps to
cooperate in tracking down terrorist funds. But, frankly, the
robustness of their regulatory approach does not match the
strength of their anti-money laundering laws. For example, the
EU only bars funding by the military wing of Hamas, not its
civilian wing, when, in fact, they are all one organization,
dedicated to terror. Likewise, EU nations do not forbid
Hezbollah funding at all. Their evidentiary standards also make
it difficult to block assets. Their financial institutions
submit a very low number of SAR's and their porous borders
invite the transit of terrorist funds.
It must be--as it appears not to be now--a major talking
point of the President to raise in meetings with foreign
leaders. If more effort is needed with the EU, then certainly,
special efforts must be made with countries like Saudi Arabia,
Pakistan, and the Gulf States, which are the principal sources
and transit points for terrorist money. Their anti-money
laundering laws are weak and their follow-up no better. They do
not deserve the diplomatic pass the Administration seems to
have given them. If we really want to put sand in the gears of
al Qaeda, we must press them to cooperate in dealing with the
phony charities and individuals who support al Qaeda, and to
come up to international standards on money laundering. We have
to speak plainly and bluntly, even if privately, in the face of
such noncooperation.
Third, we cannot skimp on technical and development
assistance to help other nations build the technical capacity
to supervise their financial systems adequately. The
President's fiscal year 2003 budget allocates only a few
million dollars to assistance. Far more is necessary.
Fourth, we need to bring the underground hawala system into
the Federal regulatory system and simultaneously urge other
countries to regulate and control them. FinCEN has not been as
effective as it needs to be to register hawalas. There is no
coordinated law enforcement plan at the Federal, State, and
local levels to register and prosecute unregistered hawalas.
And fifth, we cannot leave the job to others, even to our
allies. We must not hesitate to employ stronger measures than
diplomacy when necessary. As you pointed out, Mr. Chairman, the
Administration has made no use of the authority granted to the
Treasury by Section 311 of the USA PATRIOT Act to identify
certain aspects of terrorist financing as ``primary money
laundering concerns'' requiring special reporting, regulatory,
or other measures. This would allow sanctions short of a
Presidential designation under IEEPA, and I urge the
Administration, as Ken Dam indicated he would like to do, to
move forward on this.
These observations reflect a basic premise with which I
would like to conclude. And that is, dealing with terrorist
financing requires ``structure, integration, and focus'' both
within our Government and between our Government and its
allies. This is true not only with money laundering, but with
antiterrorism financing as well.
There has to be a common thread and that thread is working
against money laundering systems and high-risk problems
everywhere they occur, coordinated enforcement and regulatory
activity, leveling the playing field among financial
institutions so money launderers cannot go to those most weakly
regulated, and making and keeping money laundering on the
international agenda.
Thank you very much.
Chairman Sarbanes. Thank you for a very helpful statement.
Ms. Walter.
STATEMENT OF ELISSE B. WALTER
EXECUTIVE VICE PRESIDENT
REGULATORY POLICY AND PROGRAMS
NATIONAL ASSOCIATION OF SECURITIES DEALERS
Ms. Walter. Thank you, Mr. Chairman, for the opportunity to
testify before you today.
I am here today to tell you about the steps that NASD has
taken in cooperation with the Securities and Exchange
Commission, the Treasury Department, and the securities
industry to begin the implementation of those aspects of the
USA PATRIOT Act that apply to broker-dealers.
NASD, as you know, is the self-regulatory organization for
every one of the roughly 670,000 registered representatives in
the United States securities industry, and all 5,500 brokerage
firms that connect investors to the markets.
Even before the USA PATRIOT Act, we had some experience
overseeing the securities industry's compliance with anti-money
laundering regulations. For example, in July 2001, before
Congress passed the USA PATRIOT Act, NASD Enforcement filed a
case in which NASD ultimately barred a registered
representative from the industry for evading Bank Secrecy Act
reporting requirements.
In that case, we enforced the Bank Secrecy Act regulations
under an NASD rule of conduct, which obliges firms and their
employees ``to observe high standards of commercial honor and
just and equitable principles of trade.''
Today, with the advent of the USA PATRIOT Act, a number of
new anti-money laundering requirements apply directly to the
securities industry. We have worked very hard over the last
year to educate broker-dealers and to bring about and monitor
their compliance with these new requirements.
For example, NASD has adopted a rule that mirrors the USA
PATRIOT Act's mandate that all broker-dealers develop and
implement an anti-money laundering compliance program. We are
now examining our members to determine whether they are meeting
that obligation. We have issued four notices to our membership
to provide guidance and we have conducted educational workshops
to help firms build their compliance programs.
Congress wisely made anti-money laundering program
requirements flexible enough so that each firm can tailor their
own programs to the firm's size, business activities, and
customer base. Many smaller securities firms, and they are the
majority in the industry, did not have the extensive experience
with anti-money laundering regulations that large, bank-
affiliated firms have had and were uncertain about how aspects
of the USA PATRIOT Act apply to them.
To aid these firms, we developed a template to assist them
in setting up their compliance programs. In addition to giving
detailed explanations for the rules and how they apply to
various business relationships and financial products, the
template contains instructions and links to other useful
resources. Since being posted on our website in July, this
template has been consulted by our membership almost 8,000
times.
We have also created a search tool that enables securities
firms to electronically search OFAC's list. Since its launch in
June, there have been over 17,000 visits to our OFAC search
tool, which is accessible through our anti-money laundering
website.
We have also developed an online training course, which can
be used to help firms meet their USA PATRIOT Act training
obligations. As of the end of August, over 6,000 people had
registered for that course.
As soon as the statute and rule went into effect, NASD
began examining and enforcing compliance with the anti-money
laundering program requirements. Through our examinations, we
determine whether firms have the required compliance programs
and assess any deficiencies we find.
Critical in this effort has been the effective coordination
among Treasury, the SEC, and the securities SRO's. Throughout,
Treasury and the SEC have provided us with timely and helpful
information and critical feedback on our template and the other
initiatives we have undertaken.
This continued coordination will remain critical because we
must continue to provide regulatory consistency and certainty
in guiding the securities industry because, for this industry,
this is a time of great change in this aspect among others.
There are significant issues that still remain concerning how
this regulatory regime, which traditionally has applied to
depository institutions, will affect and apply to the
securities industry, and we look forward to continuing that
dialogue and that productive relationship.
I am pleased to have shared with the Committee our part in
the extensive efforts that have been made to date to ensure
compliance with the USA PATRIOT Act and, in particular, its
anti-money laundering provisions.
NASD is committed to continuing its work with Congress,
with the Treasury Department, with the SEC, and with other
regulators on this important initiative, which makes our
markets stronger and our Nation safer.
Thank you.
Chairman Sarbanes. Thank you very much for your statement.
Mr. James.
STATEMENT OF ALVIN C. JAMES, JR.
FORMER SENIOR MONEY LAUNDERING POLICY ADVISOR
U.S. DEPARTMENT OF THE TREASURY
Mr. James. Thank you, Mr. Chairman. I am very pleased to be
given this opportunity to return to your Committee to speak to
you today about our Government's anti-money laundering programs
and strategy. I serve as the leader of the Anti-Money
Laundering Solutions Group at Ernst & Young, LLP. However, the
views I am expressing here today are my own and do not
necessarily reflect the views of Ernst & Young.
Mr. Chairman, I have submitted a statement for the record
and I would like to summarize and briefly add to those remarks
today.
Chairman Sarbanes. The full statements of all of the
panelists will be included in the record.
Mr. James. Thank you, Mr. Chairman.
Chairman Sarbanes. We would appreciate your summarizing.
Mr. James. Mr. Chairman, our current National Money
Laundering Strategy is replete with all the right buzzwords--
money laundering systems, interagency cooperation, coordination
of effort and information sharing. Unfortunately, this strategy
has failed to enhance our ability to deter systemic money
laundering. It has failed because at the root of our efforts,
we cling to prosecution and indictment as our primary tool and
our primary measure of success in dealing with systemic
financial crime. We must use all the tools in our tool chest if
we are to build a solution to this systemic money laundering
problem.
The source of this failure to successfully address systemic
crime lies at a fundamental level. Major money laundering is a
systemic crime. Systemic crime is brought about by an illicit
demand within society that is not dependent upon the action of
any particular individual or group of individuals. Therefore,
the criminal conduct cannot be effectively deterred by the
threat of indictment and prosecution, fines, or imprisonment.
Systemic financial crime is crime that for various reasons will
always have a new criminal ready to step up when his
predecessor falls to criminal sanctions. When we fail to
acknowledge the shortcoming of prosecution as the sole
deterrent in critical areas, then we also failure to strategize
toward a more effective means of disruption and elimination of
the criminal systems that plague our Nation.
As I continue in my testimony, I will set out several areas
of systemic abuse of our Nation's financial structure. I will
also suggest at the end an approach that I believe might
effectively design and implement a strategy to combat systemic
crime within our enforcement and regulatory communities.
The first area of systemic abuse I would like to mention
centers on correspondent banking. I agree with Senator Grassley
that this is a very serious area of concern. The USA PATRIOT
Act began to bring attention to these correspondent
relationships.
However, in spite of the actions of the USA PATRIOT Act,
this network is currently being abused as the primary
narcotics-currency placement vehicle for the Colombian Black
Market Peso Exchange.
Money remitters make up another large category. Numerous
money remitter systems exist throughout the world. They all
offer similar services of foreign exchange and small dollar
money remittance through informal networks based on ethnicity
and trust. They exist in Asia, Africa, and South America. They
all have branches in other lands based on the Diasporas of
their people. Although they serve many useful purposes, by
their very nature, they are also vulnerable to money
launderers.
Yet another system involved the gold broker networks. The
U.S. Government has taken little notice of the workings of
these networks within our country or the world. Nonetheless, it
is possible to transfer millions of dollars of value
internationally within these amorphous networks with no paper
trail. The transfers can go from the souks of Dubai, India, and
the Far East to the brokers of Switzerland and Italy to the
coin shops of the United States. It is very likely that recent
transactions of terrorist funds were moved through this
network. There is a similar international network involving
diamonds, especially the blood diamonds that have been
described recently in the press.
False invoicing is another means of covertly moving funds
from one country to another that has existed for centuries and
is well known and well documented. Yet, as with many of the
others mentioned, it remains almost untouched by U.S. law
enforcement as a systemic means to launder money.
In addition, there are remittance companies. These firms
should be distinguished from money remitters in that they offer
discreet international transfers of funds for wealthy
individuals and firms along the lines of the services provided
for private banking clients within the legitimate financial
industry. They do so by moving these funds through their
personal accounts without notice to anyone of the true
ownership of the funds.
Finally, hawala and Colombia Black Market Peso are also
areas of systemic abuse which have been dealt with extensively
by this Committee. I describe these systems more fully in my
written testimony. But I will note here that although these
systems are well known, they continue to be major areas of
systemic money laundering abuse.
I offer the following proposal as one means to address
these problems. A coordinated effort using all of the tools
available to the Government is the key to disrupting and
dismantling systemic financial crime. The home agency solely
responsible for systemic criminal law enforcement and Bank
Secrecy Act regulatory policy and enforcement is the best means
to achieve this coordination. I strongly suggest the new agency
be given the power via a Presidential directive to coordinate
all investigations impacting systems of financial crime that
are a threat to our national security. This would be
investigations outside this agency as well as in. I also
believe it is essential to see that the new agency has the
security clearances necessary to coordinate its strategies with
the intelligence community. Finally, it is vital that this new
agency include this Nation's private financial sector as a
partner in designing and implementing overarching strategies
designed to impact systemic financial crime.
The problem of overlapping jurisdiction has always been an
impediment to cooperation and to coordination of the
investigations related to systemic financial crime. Anti-money
laundering is necessarily a fragmented jurisdiction due to the
numerous substantive crimes that generate illicit funds. But
the recognition of systemic crime gives rise to a logical
division of effort along the lines of systemic enforcement
versus individual indictment and prosecution. The agency I
proposed would be charged with systemic financial
enforcement and could pass off individual cases to the
appropriate investigating agency, thus providing an incentive
for cooperation rather than competition. In addition, the
performance of the systemic crime agency could be measured
along the lines of its strategy, which would not directly
include individual prosecution.
As an example of the type of coordinated strategy that
might arise from this agency I propose, let me turn to the area
I know best--Black Market Peso Exchange. The goal of the
following strategy would be to force the BMPE money launderer
and the Colombian drug lord to use processes to launder drug
money that are less suited to their purpose and thus, easier to
detect and attack, both by systemic and traditional criminal
enforcement. First, I propose a coordinated series of
disruption-oriented undercover operations that could be added
to the strategic plan. These operations can infiltrate the BMPE
money laundering organizations and then use their insider
status just at the right moment to seize or otherwise divert
the funds that they have been trusted to launder. Then a BSA
Geographic Targeting Order directed at correspondent banking
accounts that are funded with substantial currency deposits,
those mentioned by Senator Grassley earlier this morning, could
be added to the mix. An international arm could be included
that would coordinate the impact of intelligence to be shared
with, say, Colombian or other foreign law enforcement agencies.
In addition, related individual investigations could be
coordinated in such a way as to maximize their effect on the
overall system. And finally, the private sector could be
included by advising them at the most appropriate moment of the
overall scheme that we are trying to combat, as well as
specific countries, foreign banks or particular accounts that
are known to be involved in the system.
The overall strategy could be designed to shake the
confidence of the illicit users of the system. On the one hand,
they would lose confidence that the money that they launder is
safe and will be returned to them. On the other hand, the
appropriate individuals involved could be passed on for
individual prosecution or investigation, not only to our
country, but also by their own law enforcement as well if they
lie outside this country. Those who maintain legitimate
businesses could find their ability to use the financial
institutions throughout the world hampered by their link to
narcotics crime, if they are linked to this process. Providing
the identity of the known users of the money laundering system
to the international press could further shame and deter future
use of the system. The final effect is to eliminate the market
for Black Market Peso Exchange dollars in foreign exchange.
Such a coordinated effort as part of an overall strategy to
attack a system of financial crime could begin to impact the
system itself, rather than just chip away at the individuals
involved.
Mr. Chairman, thank you for allowing me this opportunity to
express my views. At the least, I hope that my comments will
foster a continuing debate directed at more effective
enforcement of systemic financial crime and more efficient use
of the tools available to our enforcement community.
Thank you.
Chairman Sarbanes. Thank you very much, Mr. James.
We thank all the panelists. You have made some very helpful
suggestions and very positive contributions.
We have been joined by Senator Carper. Senator, I will
yield to you at this point.
COMMENT OF SENATOR THOMAS R. CARPER
Senator Carper. I have no questions. I am delighted to see
our witnesses, and especially welcome Mr. Eizenstat.
Chairman Sarbanes. Let me try to segment this thing in time
terms.
As you heard, as I was talking with Secretary Dam and the
Deputy Attorney General, it would be our intention to get their
next strategic plan on time, or close to on time, which is
February 1.
We have also pushed them to get the system into place, as
provided for in the USA PATRIOT Act. The Treasury Department
still has some rules and regulations to do and so forth. And
then we would have an opportunity for a thorough examination of
this early in the new Congress, before a heavy legislative
agenda intervenes.
What in the interim, as we approach that thorough and
comprehensive examination, can the Congress be doing? Or what
can we do over the next few months to move this effort forward
before we undertake that review, recognizing that the number of
legislative days left are extremely limited, so there is not a
legislative agenda I think that we can pursue over the next few
months?
Does anyone have any suggestions in that regard?
Stu.
Mr. Eizenstat. Well, quite frankly, I would hope that you
and Members of the Committee, Senator Carper and others, might
incorporate some of the recommendations and suggestions that
you have heard this morning into a letter to Secretary Dam and
Deputy Attorney General Thompson so that there is a direct
input from the Committee into their Strategy.
Having a hearing is very important in terms of
accountability. But this is a place where specific
recommendations should be made. For example, as I have
suggested here, I think that the real key is political will and
that has to be expressed in a number of ways. First,
organizationally, that there is no one person in the U.S.
Government with sufficient clout who can be designated by the
President to coordinate all the diplomatic law enforcement,
political, and other activities that are necessary, nor is
there an international organization to do that.
FATF does a good job on the money laundering. But there is
nothing on the terrorist financing side.
Chairman Sarbanes. Who should that person be? Do you have a
suggestion in that regard?
Mr. Eizenstat. I think that this is something that the
Council on Foreign Relations Task Force will designate. But it
needs to be somebody that is in the White House and that has
the ear of the President and can coordinate across departmental
lines.
Chairman Sarbanes. When is that Task Force Report coming in
from the Council?
Mr. Eizenstat. It will be at the end of October and again,
I do not want to step on any headlines. They have their own
recommen-
dations. I am part of that Task Force.
Chairman Sarbanes. All right.
Mr. Eizenstat. But I think it will be very concrete. And
the same with respect to the international institution.
Second, the Congress can urge that in their Money
Laundering Strategy, that the Administration commit itself to
put the issue of money laundering and terrorist financing on
every major international fora that we participate in--APEC,
ASEAN, the EU-U.S. summits, and that we press both our close
allies in the EU and those in the Gulf and the Middle East to
take this issue more seriously and we have to break some
diplomatic crockery.
We simply cannot sit back and say that the Saudis have done
everything that we have asked them to do, when that simply is
not the case.
And third, as you have suggested here, but, again, I think
concretely, it should be something that Congress and this
Committee could ask them to include. And that is, not to back
off FATF designations, to continue to highlight those countries
which do not come up to international standards in their money
laundering laws and implementation, and to get on with the
business, as you suggested, of making these Section 311
designations.
So, I think that perhaps a letter from yourself and Members
of the Committee incorporating some of the thoughts that you
have heard from Mr. James, myself, and Ms. Walter, might mean
that the actual Strategy when it comes out is more concrete.
Chairman Sarbanes. That is very helpful. Does anyone want
to add to that?
Mr. James. I would certainly agree with Mr. Eizenstat. I
think that there is a tendency in the current Strategy and
current efforts to not see the forest for the trees. And this
Committee, by letter and comment, can continue to focus
attention on the overall effect, the impact of this Strategy,
and what it is doing to prevent terrorist financing, to prevent
money laundering, to actually move these systems toward
deterrence.
Counting the number of prosecutions, and the number of
cases we have open, all of that is well and good. But if there
is not some overarching plan to eventually diminish the
opportunity to have those cases, then I submit we are not
getting where we need to be. And I think your leadership in
that regard, Mr. Chairman would be very helpful.
Chairman Sarbanes. Ms. Walter, are you encountering any
resistance within the industry to your efforts to bring them up
to speed on these requirements and so forth? How cooperative
are people being? Or do they regard it as an imposition that
has been thrust upon them, which they are reluctantly trying to
comply with?
Ms. Walter. I would not say that we are encountering any
resistance. This has been a period of great change and turmoil,
not an easy period for the securities industry.
Given those difficulties, it is to me a tribute to the
industry that they have stepped up to the plate as well as they
have, and our initial results of our initial exams are really
quite encouraging.
We have found that well over 90 percent of the firms that
we have examined thus far, and it is about 500, do have their
compliance programs in place. They have some more work to do.
We obviously want that figure to be 100 percent and we want all
aspects of those exams to be up to snuff.
Chairman Sarbanes. Now are you examining just whether they
have established a program, or are you also examining how
thoroughly the program is being implemented?
Ms. Walter. We are examining both. Obviously, the
requirement to have the program has only been in place since
April.
Chairman Sarbanes. Right.
Ms. Walter. And the SAR's reporting requirement for most
broker-dealers has not yet gone into effect. So this will be an
evolving process.
But we have also found in our exams that people are
starting to get better attuned, and this is a new mode of
analysis particularly for many of our smaller firms, to the
issues that arise, and we use our examinations as well to point
out to them areas in which a report would be appropriate, where
a report has not up till now been required, but will shortly be
required.
Chairman Sarbanes. Right.
Ms. Walter. So both issues are really covered.
Chairman Sarbanes. Mr. James.
Mr. James. Mr. Chairman, thank you. I would add that, from
my perspective, it brought my thought back to your reference
earlier, I think when you were talking to Mr. Dam about the
club in the closet.
Chairman Sarbanes. Right.
Mr. James. I think that club could be a little bit more
effective of an incentive if it had--pardon my reference here--
but a little blood on it.
CEO's have a myriad of compliance issues that they have to
face and they have just so many dollars to fund them. And
getting a particular issue past their concern and up to the
level where they are actually going to spend some money on it
sometimes takes some incentive.
Certainly, in my perspective, most companies that I have
dealt with are very concerned about this issue and very willing
to deal with it. But they would probably have a little more
impetus to do so if some of the worst offenders out there were
brought to heel a little more effectively.
Chairman Sarbanes. Yes, it really defies common sense to
think that there aren't transactions or enterprises that could
not be found to be a primary money laundering concern and then
bring those sanctions to bear.
Mr. James. I think a few good examples along those lines
would help immeasurably.
Mr. Eizenstat. One of the reasons that we wanted to have
something like the USA PATRIOT Act was that, prior to that, we
really were between two extremes. That is, having an IEEPA
designation, which requires a major Presidential designation.
It is blocking funds of a foreign government. It is a major
diplomatic action and problem. Or virtually doing nothing
except advisories.
Chairman Sarbanes. Yes.
Mr. Eizenstat. And the purpose of this was to try to give a
more flexible set of sanctions short of a Presidential
designation that can be taken, as you pointed out in your own
questioning, not just against a government, but against a type
of transaction or against a particular financial institution as
well, rather than the government itself. That flexibility
should be employed. That is the whole purpose of it so, again,
we were not forced to either do virtually nothing except
advisories or the nuclear bomb of an IEEPA designation.
Chairman Sarbanes. Yes, I think that is a very apt
observation. And it is obviously why we structured it that way
and it does offer an opportunity, it seems to me, as Mr. James
said, to send some very important messages. And I think if you
send out a few of those messages, they are going to have a real
impact.
There is a vote underway and so I have to draw this to a
close. But we very much appreciate your testimony. We probably
will seek to call on you again in the future and we are most
grateful to you for your responsiveness and your assistance as
we examine this problem.
The hearing is adjourned.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[Prepared statements and additional materials supplied for
the record follow:]
PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
Thank you, Chairman Sarbanes. I am glad you have called this
hearing.
I would also like to welcome our colleague, Senator Grassley, to
today's hearing. He has been a real leader on the subject of money
laundering.
He and I have worked together in encouraging the Administration to
move promptly in issuing a regulation regarding concentration accounts
and their potential use as a vehicle for terrorist financing--a subject
that I hope the Treasury
Department will update us on today. I look forward to hearing Senator
Grassley's comments today.
Combating money laundering in the aftermath of September 11 has
proven to be particularly critical. We have long seen money laundering
associated with terrible illegal activities such as drug trafficking.
These activities pose ongoing serious challenges to our country, but
now we must also look at the fight against money laundering as one to
ensure our basic national security.
Our task since the horrible attacks has not been a simple one.
However, this Committee acted swiftly and aggressively after the
attacks to address terrorist financing. I was proud to have been an
active participant in that debate.
We now have an opportunity to examine the implementation of the
International Money Laundering Abatement and Financial Anti-Terrorist
Act. I am anxious to hear the testimony of our witnesses about the
promulgation of regulations related to the Act and to hear their
assessment of how the law is working. I also welcome their insight on
what Congress can further do to help combat terrorist financing.
The free movement of money across borders, unnoticed and untracked
is so critical to the work of terrorists. By acting quickly to cut off
the supply of money, we limit their ability to act. This is key. As I
have said in this Committee before, in this new era, economic warfare
will be one of our strongest weapons against terrorism. Terrorists who
would destroy our way of life, in an ironic way need our institutions
to thrive and we will not allow that to happen.
Thank you again, Mr. Chairman, for calling this hearing today. I
appreciate your vigilant attention to this matter.
----------
PREPARED STATEMENT OF JOHN F. KERRY
A U.S. Senator from the State of Massachusetts
October 3, 2002
Mr. Chairman, I would like to thank you for the opportunity to
testify again on the implementation of the anti-money laundering
provisions included in the USA PATRIOT Act. I know that these anti-
money laundering provisions would not have been included in the law,
and their implementation would not be as effective, without your hard
work and dedication.
The USA PATRIOT Act provides a clear warning to those who have
assisted or unwittingly assisted those involved in the al Qaeda network
or other terrorist organizations in laundering money that the United
States will take whatever actions are necessary to stop those funds
from entering into the United States. These actions include denying
foreign banks and jurisdictions access to the U.S. economy, to stop
terrorists and international criminal networks from laundering money
into the United States through the international financial system.
Over the past year, the United States and our allies have made
important progress to limit the ability of terrorist organizations to
move money through the international financial system. But we must do
far more to coordinate and marshal the resources of the Federal
Government and international organizations to fully implement an
effective strategy that will end the scourge of money laundering.
In September, a United Nations report said that despite initial
successes in locating and freezing $112 million in assets belonging to
al Qaeda and its associates, al Qaeda continues to have access to
considerable financial resources. The frozen funds represent only a
small fraction of the economic resources that many experts believe are
still available to al Qaeda. The United Nations also reports that funds
to assist al Qaeda continue to be available from bin Laden's own
personal inheritances and investments; from funding provided by members
and supporters of al Qaeda and from contributions from some Islamic
charitable organizations. The report also states that a large number of
ostensibly legitimate businesses continue to be maintained and managed
on behalf of bin Laden in northern Africa, Europe, the Middle East, and
Asia.
This report highlights the need for additional steps to increase
intelligence and information sharing to stop al Qaeda from moving funds
within the international financial system.
The USA PATRIOT Act includes legislation, which I sponsored, that
provides the tools the United States needs to crack down on
international money laundering havens and protect the integrity of the
U.S. financial system from the influx of tainted money. The United
States has the largest and most accessible economic marketplace in the
world. Foreign financial institutions and jurisdictions must have
unfettered access to markets to effectively work within the
international economic systern The Secretary of the Treasury now has
the authority to leverage the power of our
markets to force countries or financial institutions to stop
interacting with known terrorists and those involved with money
laundering. I am surprised and deeply dismayed that the Bush
Administration has taken no steps to exercise its authority under this
law. I believe that the Bush Administration's inaction is especially
troubling given the current threats the United States faces.
The USA PATRIOT Act also includes a number of important provisions
that have begun to seal the cracks in existing law and that provide new
tools to law enforcement to stop money laundering. First, the law
requires U.S. financial institutions to use appropriate caution and
diligence when opening and managing accounts for foreign financial
institutions. Second, it prohibits foreign shell banks, that have no
physical location in any country from opening accounts in the United
States and
requires our financial institutions to take reasonable steps to ensure
that foreign banks are not allowing shell banks to use their U.S.
accounts to gain access to the U.S. financial system. Third, it expands
the list of money laundering crimes and it assists our law enforcement
efforts by making it easier to prosecute those crimes. Fourth, it
requires financial institutions to develop appropriate anti-money
laundering programs. Finally, it prohibits the use of concentration
accounts that allow foreign banks to transfer large amounts of cash
into the United States without including appropriate information on the
beneficial owner of the funds. As the final regulations for the USA
PATRIOT Act are developed, it is my hope that the U.S. Department of
the Treasury will work with the online commerce industry to develop
appropriate standards for identifying suspicious behavior and to combat
money laundering which do not unnecessarily invade the privacy of
American consumers.
With this new law in place, we must now continue to develop a broad
strategy both within the Federal Government and in coordination with
our allies to stop international terrorists from laundering money into
the United States. As the in-
ternational financial system becomes more adept at stopping money
laundering, terrorists will become more adept at developing new and
more sophisticated ways of moving funds internationally. The Federal
Government must do a better job of integrating and coordinating among
its investigative, prosecutorial, and regulatory
resources to combat money laundering. Better information sharing and a
central coordination point among Federal agencies fighting money
laundering, as has taken place in efforts to deal with terrorist
financing, is overdue and will assist in a broad range of efforts.
Additional funding is needed for many agencies and programs that
fight money laundering. The Financial Crimes Enforcement Network
(FinCEN) within the U.S. Department of the Treasury supports the
investigative efforts of both law enforcement and financial
institutions to stop domestic and international financial crimes.
FinCEN deserves additional funding to expand its ability to work with
financial institutions in the United States to review Suspicious
Activity Reports (SAR's) that help discover illegitimate banking
activities. The Electronic Crimes Task Force developed by the U.S.
Secret Service has been effective in stopping attacks on our critical
financial infrastructure and has stopped financial fraud. These efforts
must be continued and expanded with adequate resources. They must also
be coordinated with the work already being done by the Department of
Justice, the Federal Bureau of Investigation, and others, to combat
money laundering.
I am deeply concerned that terrorists and international criminal
organizations are hiding money derived from the sale of drugs, weapons,
and other criminal enterprises, in countries with inadequate tax laws,
called ``tax havens.'' In many cases, the funds that criminals hide in
these tax havens have already been laundered in the international
financial system. To stop criminals from hiding the proceeds of crime,
I have introduced the Tax Haven and Abusive Tax Shelter Reform Act of
2002. First, the bill would impose strict measures against nations
identified as uncooperative tax havens. Second, it would impose strict
measures against those which use confidentiality rules and practices to
undermine tax enforcement and administration or refuse to participate
in effective information exchange agreements. Third, it would limit
foreign tax credits claimed by taxpayers operating in uncooperative tax
havens. Finally, it would require a strict reporting of outbound
transfers by U.S. taxpayers and impose a new civil penalty on U.S.
taxpayers who fail to report an interest in an offshore account.
The events of September 11 and the recent United Nations report
show the need for additional efforts by the United States and its
allies to limit the ability of international terrorists and others to
use tax havens to hide the proceeds of their crimes. I remain extremely
concerned about the Bush Administration's policy to take a unilateral
approach to the issue of tax havens and to step away from the bilateral
efforts of the European Union and the Organization of Economic
Cooperation and Development (OECD) to place appropriate limits on tax
havens. Contrary to what some claim, the OECD approach does not punish
countries just for having low tax rates or seek a harmonization of tax
policy. Instead, the OECD attempts to reduce the number of countries
whose tax systems have a lack of transparency, a lack of effective
exchange of information and those that have different tax rules for
foreign customers than for its own citizens. I believe the Bush
Administration approach will make it more difficult for the
international community to track and freeze the assets international
terrorists like bin Laden and expand upon our recent progress in
fighting financial crimes.
Working together, we have achieved a great deal to crack down on
international money laundering havens and to protect the integrity of
the U.S. financial system from the influx of tainted money. I look
forward to working with Chairman Paul Sarbanes and others to ensure
that the new law is properly implemented to stop international criminal
and terrorist networks from laundering the financial proceeds of their
crimes and to stop the use the international financial system to
develop terrorist networks and fund terrorist actions.
----------
PREPARED STATEMENT OF KENNETH W. DAM
Deputy Secretary, U.S. Department of the Treasury
October 3, 2002
Chairman Sarbanes, Ranking Member Gramm, and distinguished Members
of the Committee, thank you for inviting me to testify about the
implementation of the USA PATRIOT Act and the National Money Laundering
Strategy. In many ways, the National Money Laundering Strategy and the
USA PATRIOT Act regulations are central to the war on terrorism. I
applaud the Committee for its work in passing the USA PATRIOT Act and
its continued interest in the success of the National Money Laundering
Strategy. I look forward to continuing to work with the Committee as we
further implement the Act.
Before reviewing the work we have done to implement the Act and
discuss the status of the 2002 National Money Laundering Strategy, I
wish to update the Committee on the progress we are making on the
financial front of the war on terrorism. Along with my testimony, I am
submitting a document entitled, ``Contributions by the Department of
the Treasury to the Financial War on Terrorism.'' This document is
available on our website at http://www.treas.gov/press/releases/
reports/2002910
184556291211.pdf.
The President has emphasized that the financial front of the war on
terror is critically important to America's success in fighting
terrorism. The President has directed the Secretary of the Treasury and
the Department, in coordination with other departments of the Federal
Government and with other nations, fight this front on the war on
terrorism. As set forth in Goal 2 of the National Money Laundering
Strategy, the long-term battle against terrorist financing requires a
multifaceted approach: (1) intelligence gathering; (2) freezing of
suspect assets; (3) law enforcement actions; (4) diplomatic efforts and
outreach; (5) smarter regulatory scrutiny; (6) outreach to the
financial sector; and (7) capacity building for other governments and
the financial sector. This is an integrated interagency strategy
because these efforts draw on the expertise and resources of the
Treasury Department and our sister
departments and agencies, as well as our foreign partners and the
private sector.
As Deputy Secretary of the Treasury, I ensure that this Strategy
and the Secretary's initiatives draw on the relevant expertise within
the Department and are implemented across all the components of the
Department. I also help lead National Security Council deputies
committee meetings in setting strategic priorities for the financial
front. Our Under Secretary for Enforcement, Jimmy Gurule, leads our
enforcement bureaus including the United States Customs Service, the
United States Secret Service, the Financial Crimes Enforcement Network
(FinCEN), and the Office of Foreign Assets Control (OFAC) in fighting
terrorist financing. In addition, Under Secretary Gurule oversees a
particularly important Treasury initiative, Operation Green Quest--an
interagency task force that draws upon expertise in the Customs
Service, the United States Secret Service, the IRS Criminal
Investigations
Division (IRS-CI), the Department of Justice, the FBI, and the other
agencies to investigate terrorist financing. Our Under Secretary for
International Affairs, John Taylor, works, along with the State
Department and the Department of Justice, to build and maintain the
international coalition against terrorist financing. Our Under
Secretary for Domestic Finance, Peter Fisher, works to help implement
the USA PATRIOT Act, and to help protect our Nation's critical
financial infrastructure. And, of course, we have many, many employees
who are working hard and, in some cases, putting their lives at risk to
fight the financing of terror. In all of these efforts, we work closely
with the State Department, the Department of Justice, and other
departments. This is a team effort and our success depends on it.
Achievements in Financial Aspects of U.S. Anti-Terrorism Initiatives
Our goal is straightforward. We seek to prevent terrorist attacks
by: (1) disrup-
ting terrorist finances in the short and the long term; and (2)
following financial trails to disrupt terrorists themselves. Our
challenge is to accomplish this without unduly compromising or
burdening legitimate businesses or our citizens privacy. We expect our
ability to do this to grow as we learn more about the threat and our
enforcement and penalty strategies in accordance with this.
Our first actions after the tragedy of September 11 were to
identify known terrorists and terrorist entities, freeze their assets
in the United States, and work with our allies to extend those freezes
worldwide. Since September 11, the United States and other countries
have frozen more than $112 million in terrorist-related assets. The
actual amount of money blocked understates the full effect of the
blocking action in that our efforts to freeze accounts and fund
transfers have effectively cut the flow of terrorist money through
funding pipelines and permanently excluded designees from using the
formal financial system. For example, we--through OFAC blocking
actions, law enforcement actions performed by Operation Green Quest and
the FBI and subsequent prosecutions--we disrupted al Barakat's
worldwide network that, by some estimates, was channeling $15 to $20
million dollars a year to al Qaeda. As another example, we froze the
assets of the Holy Land Foundation for Relief and Development, which,
as the principal U.S. fundraiser for Hamas, raised over $13 million in
2000.
Where warranted, we have also unblocked funds. Three hundred fifty
million dollars in Afghan government assets that were frozen in
connection with the Taliban sanctions, mostly before September 11, have
now been unfrozen for use by the legitimate Afghanistan government.
We have obtained strong international cooperation in this effort.
All but a small handful of countries have pledged support for our
efforts, over 160 countries have blocking orders in force, hundreds of
accounts worth more than $70 million have been blocked abroad, and
foreign law enforcement agencies have acted swiftly to shut down
terrorist financing networks and to seize terrorists' assets. The
United States has often led these efforts, but there have also been
important independent and shared initiatives. To cite just four
examples: On March 11, 2002, the United States and Saudi Arabia jointly
referred to the U.N. Sanctions Committee two branches of a Saudi-based
charity; on April 19, 2002, the G7 jointly designated nine individuals
and one entity; on August 29, 2002, the United States and Italy jointly
designated twenty-five individuals and entities; and, on September 6,
2002, the United States and Saudi Arabia jointly referred to the U.N.
Sanctions Committee Wa'el Hamza Julaidan, an associate of Osama bin
Laden and a supporter of al Qaeda terror. These efforts have been
bolstered by actions from the European Union, which has issued three
lists of designated terrorists and terrorist groups for blocking and by
Germany, which recently submitted the names of four al Qaeda terrorists
connected to the September 11 hijackers to the United Nations Sanctions
Committee. Also, other countries have been taking proactive freezing
actions and enforcement measures.
In addition to these efforts, we work with countries daily to get
more information about their efforts and to ensure their cooperation is
as deep as it is broad. In many cases, we provide technical assistance
to countries to help them develop the legal and enforcement
infrastructure they need to find and freeze terrorist assets.
We have also had success pursuing international cooperation through
multilateral forums including the U.N., the G7, APEC, the G20, the
Financial Action Task Force (FATF), the Egmont Group, and the
international financial institutions. In particular, Treasury continues
to play a strong leadership role in FATF, a 31-member organization
dedicated to the international fight against money laundering. In late
October 2001, the United States hosted an Extraordinary FATF Plenary
session, at which FATF adopted eight Special Recommendations on
Terrorist Financing. These recommendations quickly became the
international standard on how countries can take steps to avoid having
their financial systems abused by terrorist financiers. Many non-FATF
members have committed to implement these recommendations, as well.
Over 80 non-FATF members have already submitted reports to FATF
assessing their compliance with these recommendations. We are
continuing our work within FATF to ensure that member countries fully
implement the recommendations.
We are cleaning up the financial environment generally. Hardly a
week passes without news that a foreign government or bank has taken an
important new step to crack down on money laundering or terrorist
financing. For example, according to foreign press accounts, Thailand
recently announced plans ``to reduce the minimum value of transactions
subject to scrutiny'' by its anti-money laundering office. As another
example, the foreign press recently reported that Qatar National Bank
provided its entire staff with a 4-day course on fighting money
laundering and terrorist financing. There are scores of similar
examples involving countries around the globe.
Governments are also taking steps to prevent charities from being
abused by terrorists. In the United States, we have designated or
blocked the assets of several U.S. and foreign charities including the
Holy Land Foundation, the Afghan Support Committee, and the Pakistan
and Afghan offices of the Revival of Islamic Heritage Society. We have
also blocked the financial accounts of the Benevolence International
Foundation and the Global Relief Foundation pending ongoing
investigations of these organizations. The international community,
including FATF, is also focused on this issue because of the threat it
poses not only to our collective security but also to the sanctity of
charitable giving. Kuwait and Saudi Arabia have each reportedly
established new supervisory authorities to better regulate charities.
This work is very important. Charity is an important component of many
religions, including Islam, and few acts are as reprehensible as
misusing charities for terrorist purposes. We seek to ensure a
regulatory climate in which donors can give to charities without fear
that their donations will be misused to support terrorism.
In addition to preventing terrorists from abusing our formal
financial systems, governments are taking important steps to prevent
terrorists from abusing informal financial systems, including hawala (a
centuries-old, trust-based method of moving money that generates little
paper trail). FATF's Eight Special Recommendations require member
countries to impose anti-money laundering rules on informal financial
systems, including hawala dealers. As of December 31, 2001, the United
States required money service businesses to register, maintain certain
records, and report suspicious activity. In May 2002, the United Arab
Emirates hosted an international conference where several countries
agreed to improve the regulation of hawalas by, among other things,
implementing the FATF Recommendations against hawalas and designating a
supervising authority to enforce the rules.
We have concentrated the world's attention on this problem, and
these efforts are paying off. We know that al Qaeda and other terrorist
organizations are suffering financially as a result of our actions. We
also know that potential donors are being deterred from giving money to
organizations where they suspect that the money might wind up in the
hands of terrorists.
Under leadership from the President, the Congress, and this
Committee, we are making it increasingly difficult for terrorists to
use the mainstream financial system. As a result, we believe that
terrorists increasingly will attempt to finance their operations by
smuggling bulk cash or other instruments. But smuggling is costly. It
takes time. It is uncertain. Smuggling exposes the cash or other
instruments to possible detection and seizure by the authorities.
Indeed, since September 11, our Customs Service has seized over $11
million in cash being smuggled out of the United States to Middle
Eastern destinations or with some other Middle Eastern connection. By
making bulk cash smuggling a crime, the USA PATRIOT Act helped make
these increased seizures possible.
Smuggling also exposes couriers to possible capture. This summer,
Customs, United States Secret Service, and FBI agents apprehended and
subsequently indicted Jordanian-born Omar Shishani in Detroit for
smuggling $12 million in forged cashier's checks into the United
States. The detention and arrest of Shishani are highly significant as
they resulted from the Customs Service's cross-indexing of various
databases, including information obtained by the U.S. military in
Afghanistan. That information was entered into Customs' ``watch list,''
which, when cross-checked against inbound flight manifests, identified
Shishani.
While we have had important successes, I must tell you that we have
much to do. Although we believe we have had a considerable impact on al
Qaeda's finances, we also believe that al Qaeda's financial needs are
greatly reduced. They no longer bear the expenses of supporting the
Taliban government or of running training camps, for example. As I have
cautioned before, we have no reason to believe that al Qaeda does not
have the financing it needs to conduct additional attacks.
2002 National Money Laundering Strategy
Although terrorist financing is a key component of our Anti-Money
Laundering Strategy, our fight against money laundering goes well
beyond terrorist financing issues. And just as we have made great
strides in the war against terrorist financing, the Administration's
more general fight against money laundering--domestically and
internationally--has achieved tremendous progress.
We are making solid progress on our more traditional money
laundering case investigations. For the first time, the 2002 Strategy
reports on some of the significant money laundering cases that the
Federal Government has investigated and prosecuted in the last year.
For example, earlier this year, Customs agents in New Jersey arrested
an Assistant Vice President of a bank who was operating an illegal
money transmitting business that moved approximately a half billion
dollars in 8 months. The Assistant Vice President maintained over 250
accounts at the bank, 44 of which were in the names of nonexistent
companies and people that were fronts for currency exchange firms in
Brazil. Customs received substantial assistance from IRS-CI and DEA in
the case, which is now being prosecuted by the U.S. Attorney's Office
in Newark.
In 2001, law enforcement agents of the Departments of Treasury and
Justice seized over $1 billion in criminal funds--about 38 percent of
which was related to money laundering investigations. The Departments
forfeited over $241 million in criminal assets in fiscal year 2001
relating to money laundering.
But much remains to be done. The vision for how we, as a
Government, will accomplish this mission and what we, as a Government,
hope to accomplish is laid out in the annual National Money Laundering
Strategy.
Congress directed the President, acting through the Secretary of
the Treasury, in consultation with the Department of Justice and a
number of other agencies, to develop a national strategy for combating
money laundering and related financial crimes in the Money Laundering
and Financial Crimes Strategy Act of 1998. On behalf of the President
and his Administration, this Department was proud to release the 2002
National Money Laundering Strategy, which reflects the views,
contributions, and consensus of 26 different Federal agencies, in July
of this year. I am delighted to appear before you today to discuss the
2002 Strategy. The 2002 Strategy describes our multiyear effort to
safeguard the integrity of the world's financial system and to reduce
the vulnerability of the U.S. financial institutions to criminal
activities. I am especially proud of our efforts to implement the anti-
money laundering provisions of the USA PATRIOT Act, which has become a
cornerstone of U.S. anti-money laundering efforts, and I will expand
upon those efforts in a moment.
The 2002 Strategy is precedent setting. It lays out, for the first
time, the comprehensive national strategy to attack the financing of
terrorist groups, which I have described above. It sets another
important precedent too, a precedent about
accountability, and we have the leadership of Secretary O'Neill to
thank for this.
The 2002 Strategy also reflects two themes that have driven this
Administration's approach to money laundering enforcement since its
first day in office: (1) the need for interagency coordination and
cooperation in conducting anti-money laundering policy; and (2) the
need to ensure that the information that the financial institutions are
required to report is useful, and can be used effectively by the
Government.
Effective Interagency Coordination
First, coordination. As I have already noted, 26 distinct agencies
participated in the drafting of the Strategy and all 26 are necessary
to the successful execution of the Strategy. We rely on many of these
same agencies to lend their experience and expertise in drafting
regulations to implement the USA PATRIOT Act.
We have learned through experience that it is only by working
cooperatively that we will be able to cut off the lifeblood that
criminals and terrorists rely on to finance their illegal acts. It is
vitally important to cooperate and coordinate on an interagency basis
to investigate priority targets whenever it is possible to do so.
The notion of interagency cooperation is not new. And it is not new
in the specific area of anti-money laundering investigations. In the
Money Laundering and Financial Crimes Strategy Act of 1998, Congress
directed the Secretary, in consultation with the Attorney General, to
designate High-Risk Money Laundering and Related Financial Crime Areas
or HIFCA's. HIFCA's can be established to focus on money laundering in
an industry, sector, or group of financial institutions.
These HIFCA Task Forces are intended to improve the quality of
Federal money laundering investigations by concentrating the money
laundering investigative
expertise of the participating Federal and State agencies in a unified
task force. HIFCA's are supposed to leverage the resources of the
participants and create investigative synergies. Thus, interagency
coordination on money laundering investigations takes place every
single day in HIFCA areas, and the six existing HIFCA Task Forces
initiated over 100 investigations during 2001.
Perhaps the most important of these HIFCA cases was Operation Wire
Cutter. Wire Cutter was a multiyear investigation where the U.S.
Customs Service and the Drug Enforcement Administration (DEA) teamed
with Colombia's Departamento Administrativo de Seguridad to arrest 37
individuals as part of an undercover investigation of Colombian peso
brokers and their money laundering organizations. Investigators seized
over $8 million in cash, 400 kilos of cocaine, 100 kilos of marijuana,
6.5 kilos of heroin, nine firearms, and six vehicles.
I should also note the long-standing ``El Dorado'' Task Force,
which is led by U.S. Customs and IRS in New York and is also a High
Intensity Drug Trafficking Area (HIDTA) initiative. Comprised of 185
individuals from 29 Federal, State, and local agencies, the ``El
Dorado'' Task Force is one of the Nation's largest and most successful
financial crimes task forces, having seized $425 million and arrested
1,500 individuals since its inception in 1992.
However, we recognize that it is not enough simply to create
HIFCA's or celebrate the success of isolated cases. A number of
obstacles still remain before the mission of all the HIFCA's can be
fully realized. For example, the Federal law enforcement agencies have
provided different levels of commitment and staffing to the Task
Forces. Few of the HIFCA's have succeeded in integrating non-law
enforcement personnel into their work.
We have been candid about the difficulties some of the HIFCA's have
experienced, and we discussed them in Goal 3 of the 2002 Strategy along
with our plan to determine how to improve the functioning of the
HIFCA's. During this year, the Departments of Treasury and Justice are
reviewing what has worked and what has not since the initial
designation of the HIFCA's, and will seek to implement appropriate
changes through the work of an interagency HIFCA review team.
The 2002 Strategy presents a concrete plan and a vision for further
improving interagency coordination on law enforcement investigations.
The Strategy calls on the Treasury and Justice to co-lead an
interagency effort to identify potential money laundering-related
targets, and then deploy the necessary assets to attack those agreed
upon targets. Those efforts are well under way and I am very pleased
with the progress the interagency group has made in a short period of
time.
Effective Use of Reported Information
Next, the Strategy focuses on ensuring that we are making effective
use of information that financial institutions are required to report
to the Government. Both inside and outside of Congress some have
wondered whether the information reported by financial institutions,
especially the Suspicious Activity Reports (SAR's), makes any
difference and whether any one in law enforcement reviews them. The
answer to both questions is an unequivocal YES.
Federal law enforcement agents, often together with their Federal
and State financial regulatory colleagues and State law enforcement
colleagues, currently download and review over 15,000 SAR's every
month. Each SAR filed is reviewed in the field, often by more than one
agency. Obviously, given restraints on resources and the number of
hours in the day, we have to make educated decisions about which SAR's
merit further investigation, and then proceed accordingly.
The 2002 Strategy strongly supports the creation and development of
interagency SAR Review Teams. Goal 3, Objective 1, Priority 3
specifically addresses the creation of five additional SAR Review Teams
in the U.S. Attorney Offices that do not currently have or support a
SAR Review Team, but would benefit from having one. Several HIFCA Task
Forces, such as San Juan, Los Angeles, New York, and Chicago, have also
successfully integrated their SAR Review efforts into the work of their
HIFCA Task Forces.
Let me give you a few examples of how SAR's have been used in some
high-profile cases and in recent criminal investigations.
A SAR filed in August 1998, by Republic National Bank reported
a series of suspicious transfers of large sums of money from a
Russian bank correspondent
account to accounts in the Bank of New York. Federal authorities
began an investigation of Peter Berlin and his wife, Ludmila
Edwards, a BONY Account Executive. Seizure warrants were executed
against the BONY accounts and several other Berlin entities, as
well as the correspondent account for a Russian bank at the Bank of
New York, and resulted in seizures totaling $21,631,714 from 11
different accounts. Berlin and his wife pled guilty to conspiracy,
money laundering, and conducting an illegal money transmittal
business, and agreed to criminal forfeitures totaling approximately
$8.1 million.
In January 2001, Citibank Miami filed a Suspicious Activity
Report (SAR) concerning the deposit of approximately $15 million
from an individual whom law enforcement determined to be the
``bagman'' for Vladimiro Lenin Montesinos-Torres, the former Chief
of the Peruvian National Intelligence Service (SIN). Montesinos was
under investigation in Peru for fleeing with government funds,
trafficking in narcotics, and violating human rights. Intelligence
information revealed that Montesinos had maintained a global
network of bank accounts and front companies to move and to hide
hundreds of millions of dollars received from drug traffickers,
defense contract kickbacks, embezzlement of public funds, and gun-
running since the mid-1990's. This money was deposited into banks
located in Peru, Switzerland, the Cayman Islands, Panama, and the
United States. Following the bagman's arrest, Montesinos attempted
to extort U.S. bank officials to release about $38 million seized
in connection with the investigation. This effort backfired when
Montesinos associate was arrested in Miami and cooperated with the
FBI, providing them with the location of Montesinos hiding place.
Over $22 million has been seized in the United States for
forfeiture related to this investigation.
In May of this year, as a result of several SAR's filed by
different financial institutions, three principals and the former
treasurer of a group of metal trading companies were charged with
conspiracy to commit bank fraud, mail fraud, and wire fraud in
connection with a sophisticated international scheme to defraud
banks worldwide of more than $600 million.
In April of this year, information learned from an interagency
investigation generated by SAR's led to the successful prosecution
of a man for operating an illegal money transmitting system. From
September 5, 2000 through November 2001, the defendant operated the
money transmitter without the license required by the State,
despite notice from the State supervisory agency that this was
criminal conduct. During this period, the defendant transmitted
$2.8 million to the UAE. The money transmitter in this case is one
of a number of outlets of a money transmitter system that had its
assets frozen by OFAC.
Another SAR filing led to the investigation, arrest, and
guilty plea in February of this year of three brothers who pled
guilty to fraudulently selling food stamps out of their convenience
store. The scam netted nearly $2 million. The brothers wire
transferred several hundred thousand dollars to foreign nationals
in the Middle East, and these transactions are still under
investigation by Federal agents.
SAR's have also been used to aid investigations of terrorist
financing. In the 6 month period following the September 11 attack, 255
financial institutions filed over 1,600 SAR's concerning potential
terrorist financing activity, with violation amounts ranging up to $300
million. FinCEN continues to support law enforcement efforts in
tracking terrorist financing.
Implementation of the USA PATRIOT Act
As I have just stated, the importance of the SAR's is, of course,
interrelated with our work in implementing the many provisions of the
USA PATRIOT Act. Goal 4 of the Strategy focuses on our work on the USA
PATRIOT Act and our related goal to ensure that these regulations are
meaningful and useful to law enforcement. In that vein, I wish to turn
now to an update on Treasury's implementation of the money laundering
and antiterrorism provisions of Title III of the USA PATRIOT Act. We
have devoted ourselves at the highest levels of Treasury to carrying
out the tasks that this Committee and Congress have placed on our
shoulders to improve and to fortify our anti-money laundering and
antiterrorist financing regime. The provisions of the Act, and now our
regulations, take aim at areas in which our financial services sector
may be vulnerable to abuse. As the principal architect of these new
regulations, Treasury is mindful of the need to craft rules that
achieve the goals of the Act without unduly burdening legitimate
business activities or our citizens' privacy.
Any discussion of Treasury's implementation of the USA PATRIOT Act
would be incomplete without recognition of the assistance provided by
the Federal banking agencies, the Securities and Exchange Commission,
the Commodity Futures Trading Commission, and the Department of
Justice. These agencies have lent their time and expertise for the
common goal of protecting our financial system through intelligent
regulations. Active participation by the financial services industry
that will operate under our regulations, has also been essential.
Our major accomplishments over the past 11 months include:
Together with the Federal functional regulators, issuing
proposed customer identification and verification regulations.
Developing a proposed rule to that seeks to minimize risks
presented by the correspondent banking and private banking
accounts.
Expanding our basic anti-money laundering program requirement
to the major
financial services sectors, including insurance and unregistered
investment companies, such as hedge funds.
Developing rules to permit and facilitate the sharing of
information between law enforcement and financial institutions, as
well as among financial institutions themselves.
Of course, each of these accomplishments emanated from the very
legislation that this Committee was instrumental in drafting.
Ensuring Appropriate Customer Identification and Verification of
Identification
In July, Treasury and the Federal functional regulators, jointly
issued proposed rules requiring certain financial institutions to
develop identification and verifi-
cation procedures that enable them to form a reasonable belief as to
the identity of the customer. The proposed rules apply to banking
institutions, securities brokers and dealers, mutual funds, futures
commission merchants, and futures introducing brokers. Just as this
Committee envisioned, the proposed rules seek to make mandatory what
many financial institutions are already doing--obtaining basic
identifying information from customers at the time of account opening.
However, the rules also maintain sufficient flexibility so as to
accommodate advancing technology and the wide range of channels through
which financial services are offered by these institutions, including
opening accounts via the Internet. Obtaining certain information is
mandatory, but the manner in which that information is obtained and
verified is appropriately left to the discretion and judgment of each
particular financial institution. We are continuing our work on
drafting similar regulations for the remaining types of financial
institutions that maintain accounts for customers.
From the outset, we recognized the potential benefits to a
financial institution's identification program if it were able to
reliably confirm that the customer's name matched the Social Security
number provided at the time of account opening. The most reliable
source for this information is, of course, the Social Security
Administration. This spring, we reached an agreement in principle with
the Social Security Administration to permit financial institutions to
verify with the Social Security Administration the authenticity of the
Social Security numbers provided by accountholders. We are continuing
to work out the logistical details and hope to have this service
available in the near future. However, I caution that verifying the
authenticity of a Social Security number does not ensure that the
person who provided the information is, in fact, that person.
Eliminating Risks Associated with Correspondent Banking Activities of
Foreign Banks and Other Foreign Financial Institutions
Several important provisions of the USA PATRIOT Act take aim at
systematically eliminating the risks that can exist when U.S. financial
institutions offer correspon-
dent accounts to foreign banks and other foreign financial
institutions. Given their breadth and international focus, these
provisions are some of the more significant ones in the Act.
One month after the Act became law, we issued interim guidance to
financial
institutions describing how they were to comply with two key
provisions--the prohibition on maintaining correspondent accounts for
foreign shell banks (Section 313), as well as the recordkeeping
provisions for foreign banks having correspondent accounts (Section
319(b)). A proposed rule followed shortly thereafter. Having thoroughly
reviewed public comments received and analyzed the issues presented, we
issued on September 18 a final rule implementing both provisions.
In the final rule, we have defined ``correspondent account'' to
reflect the objectives of different provisions of the Act, as well as
comments received from the private sector. With respect to the shell
bank prohibition, for example, we have construed the term
``correspondent account'' broadly to reflect the intent of Congress to
cut off
unregulated ``brass plate banks'' from the U.S. financial system.
Similarly, we determined that a broad definition of ``correspondent
account'' was appropriate for the recordkeeping provisions of Section
319(b). These recordkeeping provisions apply to correspondent accounts
maintained by any foreign bank, regardless of the jurisdiction in which
the foreign bank is licensed. Obtaining the basic information required
by this Section from all foreign banks, namely, the names of the owners
of the foreign bank and the name of a U.S. agent for service of
process, serves a valuable law enforcement purpose and will assist U.S.
banks and securities brokers with their anti-money laundering efforts.
Further, Section 319(b) also contains an im-
portant provision authorizing both the Secretary of the Treasury and
the Attorney General to serve administrative subpoenas on any foreign
banks with correspondent accounts in the United States. Any limitation
on the definition of a correspondent
account in this Section would unduly limit this subpoena power.
Treasury has also issued a proposed rule that aggressively
implements Section 312 of the Act, a provision that takes aim at a wide
array of money laundering risks associated with correspondent accounts
maintained for foreign financial institutions in the United States.
Additionally, both the statute and Treasury's proposed rule seek to
curb potential abuses in connection with private banking accounts for
foreign persons by requiring due diligence, including obtaining
information on the true ownership and source of funds placed in such
accounts. Recent events have demonstrated the risks posed by well-
intentioned financial service professionals seeking to court and
maintain wealthy foreign clients. This rule is designed to minimize
those risks. Treasury's rule also includes important safeguards to
prevent the proceeds of foreign official corruption from finding a home
in the U.S. financial system.
After issuing this proposed rule, Treasury received extensive
comments from the affected industries. While many of the issues raised
will take time to analyze, Section 312 became effective on July 23.
Accordingly, on that date we issued an interim rule that effectively
tolled the application of this provision pending our issuance of a
final rule for most financial institutions. However, because of the
importance of this provision in protecting the financial system, we
required certain financial institutions, such as banks and securities
and futures brokers, to begin conducting the type of due diligence that
will eventually be incorporated into the final rule.
Expanding the Anti-Money Laundering Regime to All Facets of the
U.S. Financial System
A basic tenet of our anti-money laundering regime is that tainted
funds will follow the path of least resistance to enter the legitimate
financial system. Therefore, a comprehensive approach to minimizing
money laundering and terrorist financing risks within the Nation
necessarily involves extending controls to the full range of financial
services industries that may be susceptible to abuse. Section 352 of
the Act embodies this approach by directing Treasury to expand the
basic anti-money laundering program requirement to all financial
institutions presenting risks of money laundering by virtue of the
products or services offered. The challenge is to take the broad
statutory mandate and translate that into rules applicable to each of
the
diverse industries defined as financial institutions under the Bank
Secrecy Act.
In April, Treasury, with the assistance of the SEC, the CFTC, their
respective self-regulatory organizations, and the banking regulators,
issued regulations requiring firms in the major financial sectors to
establish an anti-money laundering program. In addition to the banks,
which already had an anti-money laundering program requirement, we
covered securities brokers and dealers, futures commission merchants
and introducing brokers, mutual funds, money services businesses, and
operators of credit card systems. Separate rules applicable to each
financial industry were drafted to ensure that the programs would be
appropriately tailored to the risks posed by their operations. With the
pledge that we would work diligently to complete our task, the
Secretary exercised his discretion and allocated additional time for us
to study the remaining industry sectors and craft regulations.
Since that time, we have studied the business operations of the
remaining financial industries in order to take banking oriented
regulations and modify them to apply to these other industries. Members
of the remaining financial industries have never been subject to
comprehensive Federal regulation of their relationships with customers,
let alone anti-money laundering regulation. Additionally, the remaining
categories of financial industries encompass a broad range of
businesses, from sole proprietorships to large corporations, further
complicating the process of drafting a regulation that does not impose
an unreasonable regulatory burden. Following months of meetings with
industry groups and representatives, we have virtually completed our
research and are working now on the task of drafting the regulations.
We recently issued proposed rules that would require firms in
certain segments of the insurance industry and certain investment
companies (namely, those not registered with the Securities and
Exchange Commission) to establish anti-money laundering programs. These
two rules reflect the complexities of our task. For the insurance
industry, after tapping the expertise of the State insurance regulators
and both domestic and international law enforcement officials, we
tailored the rule to those areas of the industry where the products
offered are particularly susceptible to money laundering abuse and
instances of money laundering have been documented. This is primarily
the life and annuity products. Also while the insurance agent must play
a vital role in any comprehensive anti-money laundering program, we
expressly left the obligation on the insurance company to set up and
assure implementation of the program. Upon the establishment of an
effective program, the insurance company can delegate responsibilities
to the agents as appropriate. With respect to investment companies,
such as hedge funds, that are not registered with the SEC, with the
expert guidance and assistance of the SEC and the CFTC, we specifically
targeted collective investment vehicles with characteristics that make
them susceptible to money laundering. Those vehicles investing in
securities, commodity futures, or real estate fall within the rule.
Furthermore, to facilitate effective regulation, we are proposing to
require investment companies covered by the rule to file a notice with
FinCEN identifying themselves, their principal investments, and contact
information. Such a notice is crucial given that many such vehicles
often have offshore operations despite their marketing to U.S.
investors.
Another important component of an effective anti-money laundering
regime is ensuring that financial institutions report suspicious
activity to FinCEN promptly. With the able assistance of the SEC and
the Federal Reserve, we have successfully completed a final suspicious
activity reporting rule for securities brokers and dealers, ensuring
that firms in this critical financial sector have a mechanism in place
for reporting suspicious activities. Similarly, we are working with the
CFTC to complete a proposed rule that would require the futures
industry to file suspicious activity reports, and we are working with
the SEC on a rule requiring mutual funds to file suspicious activity
reports. And, although not required by the Act, we recently issued a
final rule requiring casinos to file suspicious activity reports.
Beyond these financial institutions, we are considering whether
reporting obligations should be imposed on additional financial sectors
such as the insurance industry. As we gain more experience with the
various financial sectors, we will be able to make an
informed judgment as to the efficacy of imposing reporting
requirements.
Facilitating the Sharing of Critical Information Relating to Money
Laundering
and Terrorist Financing
Early in the implementation process, I emphasized that one of the
principles that guides Treasury's implementation of Title III is
honoring a central purpose of the Act to enhance coordination and
information flow. To that end, we have issued a final rule pursuant to
Section 314(a) seeking to establish FinCEN as an information conduit
between law enforcement and financial institutions to facilitate the
sharing and the dissemination of information relating to suspected
terrorists and money launderers. The system builds upon FinCEN's
ongoing relationships with law enforcement, the regulators, and the
financial community. We have also pledged to work going forward to
provide the financial sector with additional information, such as
typologies of money laundering or terrorist financing schemes and
updates on the latest criminal trends.
Since March of this year, Treasury has authorized certain financial
institutions to share information among themselves concerning those
suspected of terrorism or money laundering pursuant to Section 314(b)
of the Act. Our final rule retains the central features of the prior
rule, but we have expanded the scope of financial institutions eligible
to share information under this provision. Also, as required by the
statute, financial institutions must provide FinCEN with a yearly
notice that they will be taking advantage of this provision to share
information.
Further facilitating the sharing of information is FinCEN's
establishment of the USA PATRIOT Act Communication System (PACS). PACS
is designed to allow participating financial institutions to quickly
and securely file BSA reports over the Internet. This e-filing will
expedite reporting the process, make the information available to law
enforcement more rapidly, and reduce the costs for financial
institutions in complying with the filing of BSA reports. FinCEN has
completed a successful beta test in which twenty-six major financial
institutions volunteered to file their BSA reports using this system.
They have also begun offering this optional filing method to financial
institutions generally.
Conclusion
In summary, we have made substantial progress in the global fight
against money laundering, through our coordinated efforts, including
our work in terrorist financing and the National Money Laundering
Strategy and our implementation of the USA PATRIOT Act. The Act is
making a difference. Recently, USA Today reported the results of a
survey of over 2,000 financial professionals. Sixty-nine percent of
them agreed that the USA PATRIOT Act will prevent terrorist access to
the U.S. financial system. They are right. We believe that the Act is
making it increasingly difficult for terrorists to use the U.S.
financial system. We are disrupting their
ability to plan, operate, and execute attacks. And we are forcing them
to resort to methods, such as bulk cash smuggling, that expose them to
a greater risk of detection and capture.
Of course, we still have much more work to do, and this important
work must continue once the new Department of Homeland Security has
been created. Regardless of the final structure of the new Department,
Treasury will continue playing a pivotal role.
For example, our regulatory and oversight responsibilities for the
USA PATRIOT Act and Bank Secrecy Act will continue. We are hard at work
on developing additional implementing regulations, and I have testified
repeatedly that the work does not stop once the regulations have been
released. Time and experience will allow reasoned reflection on the
decisions we have made, and it is incumbent upon the Treasury to make
adjustments to these rules when it is necessary to ensure that they
continue to achieve our goals.
To that end, I announced the creation of a new task force within
the Treasury, the Treasury/USA PATRIOT Act Task Force. This task force
will work with other financial regulators, the regulated community, law
enforcement, and consumers to improve the regulations that we have
issued in light of the experience we gain through implementation.
Even after the creation of the new Department, Treasury will
continue to participate in analyzing and investigating the information
reported by financial institutions. IRS-Criminal Investigation will
maintain its leadership of the interagency SAR Review Teams that I
discussed earlier in my testimony. Again, these SAR Review Teams
currently review over 15,000 SAR's each month. IRS-CI has established
41 SAR Review Teams across the country and will continue to devote
substantial resources to this effort.
OFAC, of course, will continue its role in administering targeted
financial sanctions. FinCEN will also remain at work in developing new
analytical tools to find patterns in the data provided by the financial
institutions. In addition to its traditional role of supporting law
enforcement agencies on specific investigations, FinCEN has begun to
develop proactive leads to send to the field for investigation. FinCEN
will continue these efforts and continue to send the necessary
information to the appropriate law enforcement agencies, wherever they
hang their hats at the end of the day.
We look forward to working with the new Department and the
Committee on our continued work toward our common goal.
CONTRIBUTIONS BY THE U.S. DEPARTMENT OF THE TREASURY
TO THE FINANCIAL WAR ON TERRORISM
FACT SHEET
U.S. Department of the Treasury
September 2002
``This morning, a major thrust of our war on terrorism began with
the stroke of a pen. Today, we have launched a strike on the financial
foundation of the global terror network . . . we will direct every
resource at our command to win the war against terrorists: every means
of diplomacy, every tool of intelligence, every instrument of law
enforcement, every financial influence. We will starve the terrorists
of funding, turn them against each other, rout them out of their safe
hiding places and bring them to justice.''
President George W. Bush
September 24, 2001
Announcing Executive Order 13224
``If you have any involvement in the financing of the al Qaeda
organization, you have two choices: cooperate in this fight, or we will
freeze your U.S. assets; we will punish you for providing the resources
that make these evil acts possible. We will succeed in starving the
terrorists of funding and shutting down the institutions that support
or facilitate terrorism.''
Treasury Secretary Paul O'Neill
September 24, 2001
Table of Contents
1. Executive Summary
The challenge, objective, approach and actions the United States
has taken, and the results of those actions.
2. Executive Order 13224
The Order expands the United States' power to target the support
structure of terrorist organizations, freeze the U.S. assets and block
the U.S. transactions of terrorists and those that support them, and
increases our ability to block U.S. assets of, and deny access to U.S.
markets to, foreign banks who refuse to cooperate with U.S. authorities
to identify and freeze terrorist assets abroad.
3. USA PATRIOT Act
This legislation, signed into law by President Bush on October 26,
2001 contained new tools to enhance our ability to combat the financing
of terrorism and money laundering.
4. Charities
Charities across the Nation do important work, making a difference
in the lives of millions of people. Americans and others around the
world donate hundreds of billions to charity, with humanitarian intent.
They deserve to know that protections are in place to assure that their
contributions do good work. Unfortunately, some charities have been
abused by those who finance terror, through schemes to siphon money
away from humanitarian purposes and funnel it to terrorism.
5. Hawalas
The word ``hawala,'' meaning ``trust'' refers to informal money or
value transfer systems or networks outside the formal financial sector.
Hawala provides a fast and cost-effective method for worldwide
remittance of money or value, particularly for persons who may not have
access to the financial sector. Due to the lack of transparency in
hawala and other alternative remittance systems, there is substantial
potential for abuse.
6. International Efforts
Numerous multilateral groups, such as the G7, the FATF, and the
Egmont group, have marshaled their resources to join the United States
to combat terrorist financing.
7. Domestic Law Enforcement Efforts
Domestic law enforcement agencies--many within the U.S. Treasury--
have mobilized to identify terrorists networks and starve terrorists of
money.
Executive Summary
One year ago, terrorists struck our Nation with unforeseen guile
and unprecedented consequences--unprecedented consequence for Americans
and our way of life. In turn we have taken unprecedented actions to
dismantle terrorist networks. Under the leadership of President Bush,
Americans have rallied to the war on terror, and we have struck back on
every front: military, political, and financial, even as we have
strengthened our homeland defenses against future attacks.
The Department of the Treasury--in coordination with the
Departments of Justice and State--leads an interagency effort to
disrupt and dismantle terrorist financing.\1\ No less than the military
campaign, the financial war has required careful planning, domestic and
international coalition-building, and decisive execution. And as with
the military campaign, we have achieved results.
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\1\ This fact sheet highlights the Treasury Department's efforts
against terrorist financing over the past 12 months since September 11,
2001. This is not intended to document all United States Government
activity on the financial front on the war on terrorism. The activities
of other areas within the U.S. Government--specifically the
intelligence community, the military community, the diplomatic
community, and the non-Treasury law enforcement community--are not
detailed here.
---------------------------------------------------------------------------
As a necessary first step in leading the financial war against
terrorism, we have developed and published a comprehensive strategy to
identify, disrupt, and dismantle terrorist financing networks. This
strategy is three-fold. First, we are applying technology,
intelligence, investigation, and regulations to locate and freeze the
assets of terrorists, wherever they may hide. New powers granted by the
President and Congress have enabled us to scour the world financial
system for suspicious
activities with greater precision than ever before.
Second, we are attacking terrorist financial infrastructures--their
formal and underground methods for transferring funds across borders
and between cells, whether through banks, businesses, hawalas,
subverted charities, or innumerable other means. Our approach is to
deny terrorists access to the world's formal financial infrastructure
and use the money trail to locate and apprehend terrorists.
Third, we are using diplomatic resources and regional and
multilateral engagements to ensure international cooperation,
collaboration, and capability in dismantling terrorist financing
networks.
The war on terrorist financing is an immense undertaking. The
openness of our modern financial system, which allows savers and
investors to fuel economic growth, also creates opportunities for
terrorist parasites to hide in the shadows. Our challenge in this front
of the war is to protect the freedom and flexibility the world's
financial systems while driving our enemies into the sunlight, where we
and our
allies can sweep them up. We have enjoyed success, but much more
remains to be done.
The United States took six principal steps in the fall of 2001 to
pursue financial underwriters of terrorism:
1. President Bush signed Executive Order 13224 giving the United
States greater power to freeze terrorist-related assets;
2. The United States won the adoption of UN Security Council
Resolutions 1373 and 1390, which require member nations to join in the
effort to disrupt terrorist financing;
3. We are implementing the USA PATRIOT Act to broaden and deepen
information sharing and the regulatory net for our financial system;
4. We are engaging multilateral institutions such as the Financial
Action Task Force and the international financial institutions (IFI's)
to focus on terrorist financing;
5. We established Operation Green Quest--an interagency task force
which has augmented existing counter-terrorist efforts by bringing the
full scope of the Government's financial expertise to bear against
systems, individuals, and organizations that serve as sources of
terrorist funding; and
6. We are sharing information across the Federal Government, with
the private sector, and among our allies to crack down on terrorist
financiers.
The President's Executive Order 13224 explicitly targets terrorist
financing and casts a global net over the fundraisers, donors, transfer
agents, and bankers of terror. It subjects managers and fiduciaries of
nongovernmental organizations, foreign financial institutions and
donors to economic sanctions if they support terrorism.
The UN Security Council Resolutions amplify the effect of the
President's Executive Order. The resolutions--1373 and 1390--direct
member states to criminalize terrorist financing and to adopt
regulatory regimes intended to detect, deter, and freeze terrorist
funds. The UN actions have been critical to winning support for our
campaign, and they have been essential tools for building the
international coalition against terrorist financing.
International alliances against terrorism are crucial, because the
overwhelming bulk of terrorist assets, cashflows, and evidence lie
outside our borders. We are working strategically with allies around
the world to address regional threats: we have recently submitted names
to the UN jointly with Italy, Saudi Arabia, China, and central Asian
states. To augment our allies' good intentions and capabilities, we are
providing technical assistance to many Persian Gulf, African, South
American, and Southeast Asian countries. Our assistance allows them to
accomplish their goals for neutralizing those who support terror.
We are reaching out to other international organizations, such as
the Financial Action Task Force (FATF), an international body created
to fight money laundering, to impact terrorist financing. FATF adopted
eight principles of conduct specifically directed at terrorist
financing--Eight Special Recommendations that all member nations have
endorsed and moved to implement. The U.S. Treasury Department has also
prompted the G7, the G20, the IMF, and the World Bank to take actions,
enlisting their member nations in the comprehensive program against
terror.
Domestically, the enactment of the USA PATRIOT Act has provided
several tools for the financial front of the war. The USA PATRIOT Act
imposes responsibilities for opening and monitoring bank accounts,
permits information sharing within the Government and among financial
institutions, bars transactions with shell banks, requires information
from foreign financial institutions, protects sensitive evidence from
disclosure, and expands the industry sectors subject to rigorous anti-
money laundering and terrorist financing compliance programs. The USA
PATRIOT Act also encourages partnerships between the Government and the
private sector. Treasury and the FBI have reached out to the financial
services sector in order to develop effective screening mechanisms for
suspect transactions.
Over the past year, we have seen successes in the financial war on
terrorism.
For example, we exposed and dismantled the al Barakat financial
network. Al Barakat's worldwide network and its owners were channeling
several million dollars a year to and from al Qaeda. Last November,
Treasury agents shut down eight al Barakat offices in the United
States, and took possession of evidence that will be investigated for
further leads in the terrorist money trail. Millions of dollars have
moved through these U.S. offices of al Barakat. At its core, it was a
conglomerate operating in 40 countries around the world with business
ventures in telecommunications, construction, and currency exchange.
They were a source of funding and money transfers for bin Laden. Our
allies around the world are joining us in cutting al Barakat out of the
world financial system. Dubai, UAE is the home base of al Barakat. The
UAE blocked the accounts of al Barakat, paralyzing the nerve center of
the operation.
Another success is our action against the Holy Land Foundation for
Relief and Development. Holy Land headquartered in Richardson, Texas,
raises millions of dollars annually that is used by Hamas. In 2000,
Holy Land raised over $13 million. Holy Land supports Hamas activities
hrough direct fund transfers to its offices in the West Bank and Gaza.
Holy Land funds are used by Hamas to support schools that serve Hamas
ends by encouraging children to become suicide bombers and to recruit
suicide bombers by offering support to their families. Our action
blocked their current accounts and prohibits U.S. persons from doing
business with Holy Land in the future, thereby stopping the flow of
millions of dollars every year from the United States to Hamas.
Our war on terror is working--both here in the United States and
overseas. We are harvesting information, and we are putting it to good
use. We are seeing progress. We have frozen dollars and the assets of
organizations, stopping acts of terror before they can occur, and
forcing terrorist backers to riskier, more vulnerable positions.
Our efforts are having real-world effects. al Qaeda and other
terrorist organizations are suffering financially as a result of our
actions. Potential donors are being more cautious about giving money to
organizations where they fear that the money might wind up in the hands
of terrorists. In addition, greater regulatory scrutiny in financial
systems around the world is further marginalizing those who would
support terrorist groups and activities.
The war on terrorism is only beginning, and it is certain to demand
constant vigilance. In the year since that terrible day, we have hit
them hard. Our goal is to bankrupt their institutions and beggar their
bombers. This war--the financial war against terrorism--won't be easy
and much more remains to be done. We are off to a good start but it is
a long obstacle filled road ahead. We will not relent.
Executive Order 13224
``We will starve terrorists of funding, turn them against each
other, rout them out of their safe hiding places, and bring them to
justice.''
President George W. Bush
September 24, 2001
On September 24, President Bush issued Executive Order 13224,
authorizing the blocking of the assets of terrorists and those who
assist them.
The Order expands the Treasury Department's power to target the
support structure of terrorist organizations, freeze the assets subject
to U.S. jurisdiction and block the transactions of terrorists and those
that support them, and deny them
access to U.S. markets.
Disrupting the Financial Infrastructure of Terrorism
The Executive Order--
Targets all individuals and institutions linked to global
terrorism.
Allows the United States to freeze assets subject to U.S.
jurisdiction and prohibit transactions by U.S. persons with any
person or institution designated pursuant to the Executive Order
based on their association with terrorists or terrorist
organizations.
Names specific individuals and organizations whose assets and
transactions are to be blocked.
Punishes financial institutions at home and abroad that
continue to provide resources and/or services to terrorist
organizations.
Authorities Broadened
New Executive Order actions and authorities:
The Executive Order blocks the U.S. assets and transactions of
specified terrorists, terrorist organizations, and terrorist supporters
and authorizes the imposition of blocking orders on additional domestic
or foreign institutions that support terrorism. It also directs Federal
agencies to work with other nations to cut off funding and shut down
the institutions that support or facilitate terrorism.
The new Executive Order broadens existing authority in three
principal ways:
It expands the coverage of existing Executive Orders from
terrorism in the Middle East to global terrorism.
The Order expands the class of targeted groups to include all
those who provide financial or material support to, or who are
``associated with,'' designated terrorist groups.
Establishes our ability to block the U.S. assets of, and deny
access to U.S. markets to, those foreign banks that refuse to
freeze terrorist assets.
Blocking Terrorist Assets
The Order prohibits U.S. transactions with designated
terrorist organizations, leaders, support networks, donors, and
corporate and charitable fronts.
Terrorist groups from around the world are designated under
the Order, including organizations that are related to the al Qaeda
network.
Terrorist leaders and operatives are listed; including Osama
bin Laden and his chief lieutenants along with many of the entities
that act as a support network for al Qaeda, including charities and
front organizations.
The Order authorizes the Secretary of State and the Secretary
of the Treasury to make additional terrorist designations.
--The Treasury's Office of Foreign Assets Control (OFAC) plays a key
role in implementing and administering the Order, including by
working with financial institutions to ensure that they
implement blocking orders and maintaining a current list of
designated entities on its website: http://www.ustreas.gov/
offices/enforcement/ofac
Results
Two hundred thirty-six individuals, entities, and organizations are
currently designated under the Executive Order as supporters of
terrorism. This includes 112 individuals ranging from organizational
leaders such as Osama bin Laden and his key lieutenants to terrorist
operatives, financiers, and intermediaries around the globe. All 34
U.S.-designated Foreign Terrorist Organizations are listed under the
order as are 15 other terrorist organizations such as the Continuity
IRA and the East Turkistan Islamic Movement. Seventy-four other
companies, charitable organizations, or entities who support and/or
finance terrorism are also listed under the Order. Working bilaterally
and through the United Nations and other multilateral institutions, we
have spread the effort to freeze terrorist assets across the globe.
Over 165 countries and jurisdictions have issued blocking orders
against the assets of terrorists. Since September 11, 2001, $112
million in terrorist assets have been frozen worldwide in over 500
accounts. Thirty-four million dollars of those assets are frozen in the
United States, $78 million overseas.
While the money frozen in bank accounts is one measure of the
impact of the blocking orders, it is not the most important one. Each
of the accounts frozen has the potential to be a pipeline for far more
money than what was in the account on the day it was frozen. In
addition to closing off these identified pipelines, blocking actions
have a deterrent effect leading those who would assist the financing of
terrorism to avoid use of the traditional financial system. Finally,
following the money assists worldwide law enforcement, intelligence,
and military communities to identify, capture, arrest, and neutralize
terrorists.
The Executive Order applies to all global terrorists. The list of
designees includes 74 terrorists or supporters of terrorism not part of
the al Qaeda network such as Shining Path, the REAL IRA, the Tamil
Tigers, Hamas, ETA, and Hezbollah, among others.
Just as the United States needed new Government powers to enable
the financial war on terrorism to begin, other nations around the globe
examined their laws and sought new legislation to enable them to engage
in the financial front of the war on terrorism. Since September 11,
over 180 countries and jurisdictions have implemented, passed, or
drafted legislation strengthening their abilities to combat the
financing of terrorism.
USA PATRIOT Act
On October 26, 2001, the President signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Contained
within this comprehensive package is a wide array of provisions
designed to enhance our ability to combat terrorism, the financing of
terrorism, and money laundering.
I. Provisions Bolstering our Anti-Money Laundering/Anti-Terrorist
Financing Regulatory Regime
The USA PATRIOT Act contains sweeping revisions to our anti-
money laundering and antiterrorist financing regime that
dramatically enhanced Treasury's ability to combat the financing of
terrorism and money laundering. These provisions reflect the
important principles of: (1) enhancing transparency in financial
transactions; (2) protecting the international gateways to the U.S.
financial system; and (3) increasing the vigilance of all our
financial institutions that are themselves the gatekeepers of the
financial system.
Over the past year we have:
--Issued a series of proposed and interim regulations targeting money
laundering and terrorist financing risks associated with
correspondent accounts maintained by foreign financial
institutions.
--Issued jointly with the Federal financial regulators proposed rules
requiring banks, securities brokers, futures commission
merchants, and mutual funds to establish basic customer
identification and verification procedures.
--Issued regulations requiring key financial sector industries to
implement anti-money laundering programs designed to prevent
the services they offer from being used to facilitate money
laundering or the financing of terrorism.
II. Provisions Enhancing the Ability to Share Critical Information
The USA PATRIOT Act permits and facilitates greater
information sharing among law enforcement and the intelligence
community.
Treasury has issued regulations implementing another provision
of the Act designed to improve two other key channels of
communication regarding terrorism and money laundering between the
Government and financial institutions; and among the financial
institutions themselves.
Treasury's FinCEN has developed a new, highly secure website
through which financial institutions will be able to file Bank
Secrecy Act information electronically. The same system will also
permit FinCEN, as well as financial regulators and law enforcement,
to send alerts or other communications directly to financial
institutions in a secure environment. The USA PATRIOT Act
Communication System (PACS) has the capability of providing an
instantaneous communication link between FinCEN and all financial
institutions and will better enable us to fight terrorism and
financial crime.
III. Provisions Providing the Additional Tools Necessary to Block
and Freeze Terrorist Assets
The USA PATRIOT Act also makes several amendments to
International Emergency Economic Powers Act (IEEPA), which enhances
our ability to freeze terrorist assets. In the financial war on
terrorism, this blocking and freezing power has been an essential
weapon in our arsenal. Among others things, the amendments clarify
the authority (1) to freeze assets during an investigation, and (2)
to use classified information to support a blocking order without
having to reveal that information to anyone other than a reviewing
court.
Results
The USA PATRIOT Act was enacted with the assistance of the Federal
banking regulators, the Securities and Exchange Commission, the
Commodity Futures Trading Commission, and the Department of Justice.
Since the USA PATRIOT Act was enacted, the Treasury Department has
worked with these agencies to issue over dozen regulations covering a
wide array of financial institutions and transactions.
Charities
Unfortunately, some charities have been abused by those who finance
terror, through schemes to siphon money away from humanitarian purposes
and to funnel it to terrorism. Charities across the world do important
work, making a difference in the lives of millions of people, and the
sanctity of charitable giving is a critical component of many cultures.
In 2000, for example, Americans donated $133 billion dollars to charity
with humanitarian intent. Donors around the world deserve to know that
protections are in place to assure that their contributions are being
channeled to the good purposes intended.
The President's Executive Order
Under the authority of E.O. 13224, the United States has designated
10 foreign charitable organizations as having ties to al Qaeda or other
terrorist groups and has shut down two prominent U.S.-based charities
with alleged ties to Osama bin Laden and the Taliban. In addition, the
U.S. Government has frozen the assets of the largest U.S.-based Islamic
charity which acted as a funding vehicle for HAMAS. Six million three
hundred thousand dollars in U.S. charitable funds have been frozen to
date and an additional $5.2 million have been frozen or seized in other
countries.
Outreach to Safeguard Charitable Organizations from Abuse by Terrorists
U.S. Treasury officials have met with charitable sector watchdog
and accreditation organizations to raise their awareness of the threat
posed by terrorist financing including the Better Business Bureau Wise
Giving Alliance and the International Committee on Fundraising
Organizations.
Our goal is to guard charities against abuse without chilling
legitimate charitable works. Our strategic approach, as set forth in
the recently published 2002 National Money Laundering Strategy,
involves domestic and international efforts to ensure that there is
proper oversight of charitable activities as well as transparency in
the administration and functioning of the charities. It also involves
greater coordination with the private sector to develop partnerships
that include mechanisms for self-policing by the charitable and
nongovernmental organization sectors.
International Coalition-building
We are seeking to increase the transparency and oversight of
charities through multilateral efforts. The Financial Action Task Force
(FATF) adopted a recommend-
ation committing all member nations to ensure that nonprofit
organizations cannot be misused by financiers of terrorism. The United
States submitted a paper to the FATF in June 2002 discussing our
approach to combating such abuse. Going forward, we will work with FATF
to promote international best practices on how to protect charities
from abuse or infiltration by terrorists and their supporters.
We are working bilaterally and regionally with countries in the
Persian Gulf to develop best practices for ensuring the accountability
of charitable organizations, and we have urged international watchdog
groups to expand their work to ensure transparency in charitable
operations. The vast majority of donors give to charity for
humanitarian, altruistic reasons. It is an egregious abuse of their
altruism to allow any of these funds to be diverted to terrorism.
Results
The United States has secured commitments from international
financial groups--such as FATF--to develop best practices to increase
oversight of charities.
The United States has designated 10 foreign charitable
organizations as having ties to al Qaeda and other terrorist groups and
has shut down two prominent U.S.-based charities with alleged ties to
Osama bin Laden and the Taliban. In addition, the U.S. Government has
frozen the assets of the largest U.S.-based Islamic charity which acted
as a funding vehicle for Hamas. Six million three hundred thousand
dollars in U.S. charitable funds have been frozen to date and an
additional $5.2 million have been frozen or seized in other countries.
Charities Abused by Terrorist Groups Shut Down by the United States
On January 9, 2002, the United States designated the Afghan Support
Committee (ASC), a purported charity, as an al Qaeda supporting entity.
The ASC operated by soliciting donations from local charities in Arab
countries, in addition to fundraising efforts conducted at its
headquarters in Jalalabad, Afghanistan, and subsequently in Pakistan.
The ASC falsely asserted that the funds collected were destined for
widows and orphans. In fact, the financial chief of the ASC served as a
key leader of organized fundraising for Osama bin Laden. Rather than
providing support for widows and orphans, funds collected by the ASC
were turned over to al Qaeda operatives. With our blocking action on
January 9, 2002, we publicly identified the scheme being used by ASC
and disrupted this flow of funds to al Qaeda.
Also on January 9, 2002, we designated the Pakistani and Afghan
offices of the Revival of Islamic Heritage Society (RIHS). The RIHS is
an example of an entity whose charitable intentions were subverted by
terrorist financiers. The RIHS was a Kuwaiti-based charity with offices
in Pakistan and Afghanistan. The Peshawar, Pakistan, office director
for RIHS also served as the ASC manager in Peshawar. The RIHS Peshawar
office defrauded donors to fund terrorism. In order to obtain
additional funds from the Kuwait RIHS headquarters, the RIHS Peshawar
office padded the number of orphans it claimed to care for by providing
names of orphans that did not exist or who had died. Funds sent for the
purpose of caring for the nonexistent or dead orphans were instead
diverted to al Qaeda terrorists. In this instance, we have no evidence
that this financing was done with the knowledge of RIHS headquarters in
Kuwait.
On March 11, 2002, the United States and Saudi Arabia jointly
designated the Somali and Bosnian offices of the Saudi-based al
Haramain organization. Al Haramain is a Saudi Arabian-based charity
with offices in many countries. Prior to designation, we compiled
evidence showing clear links demonstrating that the Somali and Bosnian
branch offices were supporting al Qaeda. For example, we uncovered a
history of ties between al Haramain Somalia and al Qaeda, the
designated organization al Itihaad al Islamiya (AIAI), and other
associated entities and individuals. Over the past few years, al
Haramain Somalia has provided a means of funneling money to AIAI by
disguising funds allegedly intended to be used for orphanage projects
or the construction of Islamic schools and mosques. The organization
has also employed AIAI members. Al Haramain Somalia has continued to
provide financial support to AIAI even after AIAI was designated as a
terrorist organization by the United States and the United Nations. In
late-December 2001, al Haramain Somalia was facilitating the travel of
AIAI members in Somalia to Saudi Arabia. The joint action by the United
States and Saudi Arabia exposed these operations.
On December 4, 2001, we blocked the assets of the Holy Land
Foundation for
Relief and Development, which describes itself as the largest Islamic
charity in the United States. It operates as a U.S. fundraising arm of
the Palestinian terrorist organization Hamas. The Holy Land Foundation
for Relief and Development, head-
quartered in Richardson, Texas, raises millions of dollars annually
that is used by Hamas. In 2000, Holy Land raised over $13 million. Holy
Land supports Hamas activities through direct fund transfers to its
offices in the West Bank and Gaza. Holy Land Foundation funds are used
by Hamas to support schools that serve Hamas ends by encouraging
children to become suicide bombers and to recruit suicide bombers by
offering support to their families.
On December 14, 2001, OFAC utilized this authority to block suspect
assets and records during the pendency of an investigation in the case
of Global Relief Foundation and Benevolence International Foundation,
two charities with locations in the United States.
We have also designated as terrorist supporters the al Rashid Trust
and the Wafa Humanitarian Organization both Pakistan based al Qaeda
financier organizations. Wafa was a militant supporter of the Taliban.
Documents found in Wafa's offices in Afghanistan revealed that the
charity was intimately involved in assassination plots against U.S.
citizens, as well as the distribution of ``how to'' manuals on chemical
and biological warfare.
Hawalas
The word ``hawala,'' meaning ``trust'' refers to a fast and cost-
effective method for worldwide remittance of money or value,
particularly for persons who may be outside the reach of the
traditional financial sector. In some nations hawala is illegal; in
others the activity is considered a part of the ``gray'' economy. It is
therefore difficult to measure accurately the total volume of financial
activity associated with the system; however, it is estimated that the
figures are in the tens of billions of dollars, at a minimum. Officials
in Pakistan, for example, estimate that more than $7 billion flow into
the nation through hawala channels each year.
The very features which make hawala attractive to legitimate
customers--efficiency, anonymity, and lack of a paper trail--also make
the system attractive for the transfer of illicit funds. As noted in a
recent report of the Asia Pacific Group (APG) on Money Laundering, the
terrorist events of September 2001 have brought into focus the ease
with which alternative remittance and underground banking systems may
be utilized to conceal and transfer illicit funds. Not surprisingly,
concerns in this area have led many nations to reexamine their
regulatory policies and practices in regard to hawala and other
alternative remittance systems.
Actions
The USA PATRIOT Act requires hawalas to register as ``money
services business'' or ``MSB's'' which subjects them to money
laundering regulations including the requirement that they file
Suspicious Activity Reports (SAR's).
The USA PATRIOT Act makes it a crime for the money transfer
business owner to move funds he knows are the proceeds of a crime or
are intended to be used in unlawful activity.
The new U.S. regulatory requirements are echoed in the principals
set forth in the Special Recommendations on Terrorist Financing, issued
in October 2001, by the Financial Action Task Force (FATF) on Money
Laundering. The FATF has called upon all countries to:
``take measures to ensure that persons or legal entities,
including agents, that provide a service for the transmission
of money or value, including transmission through an informal
money or value transfer system or network, should be licensed
or registered and subject to all the FATF Recommendations that
apply to banks and nonbank financial institutions. Each country
should ensure that persons or legal entities that carry out
this service illegally are subject to administrative, civil or
criminal sanctions.''
Results
The operations of several hawalas implicated in terrorist financing
have been disrupted. U.S. experts have worked with officials in other
nations on proposed licensing and/or registration regimes for
hawaladars, to ensure greater transparency and recordkeeping in their
transactions.
Using criminal authorities stemming in part from the USA PATRIOT
Act, U.S. law enforcement has charged individuals who are illegally
operating money remitting businesses.
Under the provisions of the USA PATRIOT Act, well over 10,000 money
service businesses have registered with the Federal Government and are
now required to report suspicious activities. This provides law
enforcement with an additional window into financial transactions
previously unregulated by the Federal Government.
FATF adopted eight special recommendations to impose anti-money
laundering rules on all alternative systems used for transferring
value, including hawala. Members, as well as many nonmember nations are
currently working to implement new legal and regulatory measures in
accordance with the FATF recommendation.
At a conference on hawala in the UAE in May 2002, a number of
governments agreed to adopt the FATF recommendation and shortly
thereafter the UAE government announced it would soon impose a
licensing requirement on hawalas. Participants at the UAE meeting
drafted and agreed upon the Abu Dhabi Declaration on Hawala which set
forth the following principles:
Countries should adopt the 40 Recommendations of the Financial
Action Task Force (FATF) on Money Laundering and the 8 Special
Recommendations on Terrorist Financing in relation to remitters,
including Hawalas and other alternative remittance providers.
Countries should designate competent supervisory authorities
to monitor and enforce the application of these recommendations to
Hawalas and other alternative remittance providers.
Regulations should be effective but not overly restrictive.
The continued success in strengthening the international
financial system and combating money laundering and terrorist
financing requires the close support and unwavering commitment of
the international community.
The international community should work individually and
collectively to regulate the Hawala System for legitimate commerce
and to prevent its exploitation or misuse by criminals and others.
International Efforts
UN
On September 28, 2001, the UN adopted UNSCR 1373, requiring all
member states to prevent and suppress the financing of terrorist acts.
The UN also required all member states to submit reports on
the steps they have taken to implement this resolution. As of June
27, 2002, 164 states had completed their reports. The UN is now
reviewing those reports with the intent of identifying gaps that
member nations need to fill in order to comply with UNSCR 1373.
The UN adopted UNSCR 1390 on January 16, 2002, which modifies and
continues the international sanctions against the Taliban, Osama bin
Laden, and al Qaeda as set forth by UNSCR 1267 (1999) and 1333 (2000).
Together these resolutions obligate all UN member states to ``Freeze
without delay the funds and other financial assets or economic
resources'' of those entities and individuals designated by the UN.
Currently, 288 individuals and entities are on this list (135 al Qaeda
linked and 153 Taliban linked).
G7
The G7 Finance Ministers and Central Bank Governors issued an
Action Plan to Combat the Financing of Terrorism on October 6, 2001.
Under the plan, the G7 countries:
Committed to ratifying the UN convention on the Suppression of
Terrorism.
Called on the Financial Action Task Force (FATF) to hold an
extraordinary session and play a vital role in fighting the
financing of terrorism.
Encouraged all countries to develop financial intelligence
units (FIU's) and share information more extensively.
Financial Action Task Force (FATF)
On October 31, 2001, at the United States' initiative, the 31-
member FATF issued Eight Special Recommendations on Terrorist
Financing, to be adopted by all member nations:
Ratify the UN International Convention for the Suppression of
the Financing of Terrorism and implement relevant UN Resolutions
against terrorist financing.
Require financial institutions to report suspicious
transactions linked to terrorism.
Criminalize the financing of terrorism, terrorist acts, and
terrorist organizations.
Freeze and confiscate terrorist assets.
Provide the widest possible assistance to other countries'
laws enforcement and regulatory authorities for terrorist financing
investigations.
Impose anti-money laundering requirements on alternative
remittance systems.
Require financial institutions to include accurate and
meaningful originator information in money transfers.
Ensure that nonprofit organizations cannot be misused to
finance terrorism.
Many non-FATF members have committed to complying with the 8
Recommendations and over 80 non-FATF members have already submitted
reports to FATF assessing their compliance with these recommendations.
FATF will build on its successful record in persuading
jurisdictions to adopt anti-money laundering rules to strengthen global
protection against terrorist finance. As part of this effort, FATF has
established a terrorist financing working group devoted specifically to
developing and strengthening FATF's efforts in this field. Among other
things, it has begun a process to identify nations that will need
assistance to come into compliance with the 8 Recommendations.
G20
The G20 Finance Ministers and Central Bank Governors issued an
Action Plan on Terrorist Financing on November 17, 2001. Under the
plan, G20 countries agreed to:
Implement UN measures to combat terrorist financing, including
blocking terrorist access to the financial system.
Establish FIU's and enhance information sharing.
Provide technical assistance to countries that need help in
combating terrorist financing and called on the International Financial
Institutions to provide technical assistance in this area.
International Financial Institutions
In response to calls by the International Monetary and Financial
Committee and the Development Committee, the IMF and World Bank each
developed and are implementing action plans which call for intensified
work on anti-money laundering and the combat against the financing of
terrorism (AML /CTF). The action plans call for joint Fund and Bank
action:
Expand Fund/Bank involvement in anti-money laundering work to
include efforts aimed at countering terrorism financing.
Expands Fund/Bank anti-money laundering work to cover legal
and institutional framework issues in addition to financial
supervisory issues.
Agreeing with the Financial Action Task Force on a converged
global standard on AML /CTF.
Increases technical assistance to enable members to strengthen
their AML /CTF regimes in accord with agreed international
standards.
Conducting a joint Fund/Bank study of informal funds transfer
systems.
Under its Action Plan, the World Bank is also integrating AML /CTF
issues in the Bank's country assistance strategies.
Under its Action Plan, the Fund is accelerating its Offshore
Financial Center assessment program, and has circulated a voluntary
questionnaire on AML /CFT in the context of the IMF's Article IV
consultations with its members. As part of its Article IV consultation,
the United States provided detailed responses to the AML /CFT
questionnaire.
In addition, the IMF early this year invited its member countries
to submit reports on steps that they have taken to combat the financing
of terrorism. As of the final week in August 2002, over 150 countries
out of a total IMF membership of 184 had submitted reports.
Egmont Group
The Egmont Group is an international organization of 69 financial
intelligence units (FIU's) from various countries around the world.
Each serves as an international financial network, fostering improved
communication among FIU's in sharing information and training.
The FIU's in each nation received financial information from
financial institutions pursuant to each government's particular anti-
money laundering laws, analyzes and processes these disclosures, and
disseminates the information domestically to appropriate government
authorities and internationally to other FIU's in support of national
and international law enforcement operations.
Since September 11, the Egmont Group has taken steps to use its
unique intelligence gathering and sharing capabilities to support the
United States in its global war on terrorism. On October 31, 2001,
FinCEN (the U.S. FIU) hosted a special Egmont Group meeting that
focused on the FIUs' role in the fight against terrorism. The FIU's
agreed to:
Work to eliminate impediments to information exchange.
Make terrorist financing a form of suspicious activity to be
reported by all financial sectors to their respective FIU's.
Undertake joint studies of particular money laundering
vulnerabilities, especially when they may have some bearing on
counterterrorism, such as hawala.
Create sanitized cases for training purposes.
After September 11, the Egmont Group reached out to nations across
the globe to increase the information sharing that is vital to pursuing
a global war on terrorism. In June 2002, 11 new FIU's were admitted to
the Egmont Group, increasing its size to 69 members.
Approximately 10 additional FIU's are being considered for
admission to the Egmont Group. Egmont is planning several training
sessions to continuously improve the analytical capabilities of FIU
staff around the world.
Technical Assistance and Diplomatic Outreach
Nations wanting to safeguard their financial systems from abuse by
terrorists have sought the expertise of the U.S. Government. We have
met with officials from over 111 nations, reviewing systems and
providing input to increase transparency of financial transactions and
better enable financial institutions and regulators to identify
suspicious activities. We have in cooperation with other Federal
agencies presented training programs to countries that are crucial to
the war on terrorism that focus on the creation of an effective
legislative framework to combat terrorism. These programs are ongoing.
We have also conducted, in cooperation with other Federal agencies,
reviews of priority countries' laws and enforcement mechanisms against
terrorism and made recommendations for changes and reform and proposed
follow up technical assistance to facilitate recommended changes and
reforms. These reviews are also ongoing.
After September 11, Treasury created the Office of International
Enforcement Affairs (OIEA) to coordinate and focus Treasury law
enforcement bureau's international training and technical assistance
work to complement and support U.S. Government priorities in
international law enforcement and antiterrorist fundraising efforts. As
part of this effort, Treasury is using the International Law
Enforcement Academies around the world, including in the newly
constituted Costa Rica facility, to better train law enforcement in the
field of terrorist financing.
Since September 11, 2001, Treasury's Office of Technical Assistance
has deployed dozens of technical assistance missions around the world
to combat financial crimes and terrorist financing. In several
instances, in addition to offering TA, these teams have received vital
tactical information on terrorist activities and terrorist finance and
have ensured that this information was placed in the hands of the
appropriate authorities. In addition, the Office of Foreign Assets
Control, the Office of Comptroller of Currency, and FinCEN have
traveled abroad to provide needed training and assistance to members of
the regulatory community in other countries to strengthen their
capacity to detect, monitor, and uncover terrorist financing.
Results
To date, $112 million in the assets of terrorists and their
supporters has been
frozen worldwide and the international pipeline of terrorists funds has
been constricted. Over 165 countries have issued blocking orders
against the assets of terrorists and over 80 countries have implemented
or are in the process of drafting new laws to combat terrorist
financing.
G7 Finance Ministers and Central Bank Governors announced the first
joint G7 designation and blocking action on April 20, 2002.
G7 Finance Ministers and Central Bank Governors on June 15, 2002,
urged the IMF and the World Bank to begin conducting integrated and
comprehensive assessments of standards to combat money laundering and
financing of terrorism.
IMF and World Bank Executive Boards on July 26 and August 6,
respectively, endorsed proposals to begin 12-month pilot programs
to comprehensively assess their members anti-money laundering and
terrorist financing regimes and performance. Such assessments are
expected to commence shortly.
An August 8, 2002, IMF document titled, ``IMF Advances Efforts
to Combat Money Laundering and Terrorist Finance'' (available on
the IMF website: www.imf.org) provides details on the program
endorsed by the Executive Board.
Since September 11, the international financial institutions have
increased focus on terrorist financing and anti-money laundering in
their work. The IMF in its assessment of offshore financial centers
evaluates financial supervision and regulation, and helps members
identify gaps. In 2002, 8 such assessments are already completed and
another 15 or so are scheduled or underway.
IMF and World Bank reviews and assessments of their members'
performance and strategy now generally incorporate focus on issues
relating to terrorism financing and anti-money laundering. IMF Article
IV consultations with members now encompass such reviews. In line with
its action plan, the World Bank's country assistance strategies
increase focus on the member's framework and regime to combat money
laundering and the financing of terrorism.
As of December 1999, the UN has called on all member states to sign
its Convention for the Suppression of the Financing of Terrorism. Since
September 11, 71
nations, including the United States, have done so, bringing the total
number of signatories to 131. By so doing, the countries pledge to make
the financing of terrorism a criminal act in their jurisdictions and to
cooperate with other signatories in combating it.
In addition to the important UN action, joint designations are
becoming more
frequent:
On March 11, 2002, the United States and Saudi Arabia jointly
designated two branches of a charity.
On April 19, 2002, the G7 jointly designated nine individuals
and one entity.
The European Union has issued three lists of designated
terrorists and terrorist groups for blocking.
On August 29, 2002, the United States and Italy blocked the
assets of twenty-five individuals and entities because of their
support for and connections to terrorism.
On September 6, the United States and Saudi Arabia jointly
designated Wa'el Hamza Julaidan, an associate of Osama bin Laden
and a supporter of al Qaeda terror.
On September 9, the United Nations added to its list of
terrorists and terrorist supporters associated with Osama bin Laden
and his al Qaeda network the Eastern Turkistan Islamic Movement
(ETIM).
International Law Enforcement Cooperation
One of the chief benefits of the financial war on terrorism and
following the money is to identify and locate terrorists. There has
been unprecedented law enforcement cooperation around the world as
countries ferret out terrorist operatives and support networks. As
information sharing and cooperation continue to improve, law
enforcement will continue to encircle and unveil terrorist cells.
Results
International law enforcement cooperation has resulted in over
2,400 arrests in 95 countries.
Arrests have led to the prevention of terrorist attacks in
places like Singapore, Morocco, and Germany and have uncovered al
Qaeda cells and support networks in countries such as Italy,
Germany, and Spain.
A working arrangement between the United States and
Switzerland signed on September 4, 2002, will result in the
assignment of Swiss and United States Federal agents to respective
terrorism and terrorist financing task forces to accelerate and
amplify work together on cases of common concern.
Soon after September 11, the Bahamas provided critical
financial information through its FIU to FinCEN that allowed the
revelation of a financing network that supported terrorist groups
and stretched around the world.
Interpol's website serves as a clearinghouse for foreign law
enforcement for the lists of those subject to freezing actions.
Domestic Law Enforcement Efforts
Green Quest
Treasury's Operation Green Quest augments existing counter-
terrorist efforts by bringing the full scope of the Government's
financial expertise to bear against systems, individuals, and
organizations that serve as sources of terrorist funding. The
initiative is targeting current terrorist funding sources and
identifying possible future funding sources. Underground financial
systems, illicit charities, and corrupt financial institutions are
among the entities scrutinized as possible facilitators of terrorist
funds.
The initiative also targets cash smuggling, trademark violations,
trade fraud, credit card fraud, drug trafficking, cigarette smuggling,
and other activities that may fund terrorists. Operation Green Quest
uses the full array of law enforcement techniques to pursue its
objectives, including undercover operations, electronic surveillance,
outbound currency operations, and the exploitation of intelligence,
financial data, trade data, and confidential source data. Green Quest
draws on the resources and expertise of the Treasury and Justice
Departments and many other Federal agencies.
The investigators with the Customs Service, the IRS, the FBI, and
the Secret Service are globally recognized as among the best and
brightest financial investigators in the world. They are second to
none. The same talent pool and expertise that brought down Al Capone is
now being dedicated to investigating Osama bin Ladin and his terrorist
network.
Operation Green Quest (OGQ) was established on October 25, 2001.
Customs
After September 11, the U.S. Customs Service undertook an enhanced
inbound/outbound bulk currency initiative directed at countries with
known terrorist financing links. Customs inspectors at the Nation's 301
ports of entry have made 369 seizures of smuggled currency and monetary
instruments.
The cash smuggling provisions of the USA PATRIOT Act increased
penalties against those who bring in more than $10,000 in cash or
monetary instruments with the intent of avoiding a reporting
requirement.
Cadres of Customs dogs are specifically trained to alert to the
scent of dyes and inks in currency.
Results
OGQ's investigations have resulted in over 40 arrests, 27
indictments, and the seizure of over $16 million in bulk cash, (over $9
million with Middle East connection) and are pursuing several hundred
leads into potential terrorist financing networks. (For the year ending
September 11, 2001, Operation Oasis seizures outbound to Middle and Far
East countries totaled $5.216 million. Post-September 11 seizures
outbound to the same countries total $16.1 million. Thus, there has
been a threefold increase.)
The increased scrutiny on terrorist financing has proved fruitful
to law enforcement. We are seeing an increase in seizures made by the
U.S. Customs Service. The following are a few of the seizures made to
date:\2\
---------------------------------------------------------------------------
\2\ The Treasury Department has not determined that these seizures
are related to terrorism.
Customs inspectors seized $624,691 in smuggled cash hidden in
plastic bags that were professionally sewn into the lining of a
comforter. The money-laced comforter was in a suitcase bound for
the Middle East aboard a commercial flight.
Customs inspectors seized smuggled negotiable checks totaling
$1.06 million that was hidden in a parcel bound for the Middle
East.
Customs inspectors seized a smuggled certificate of deposit
worth $297,000 that was concealed in a parcel bound for Central
America and which had originated in Asia.
Recently Customs, U.S. Secret Service, and FBI agents
apprehended and the Justice Department subsequently indicted--
Jordanian-born Omar Shishani in Detroit for smuggling $12 million
in forged cashier's checks into the United States. The Justice
Department's detention and arrest of Shishani resulted directly
from the Customs Service's cross-indexing of various databases,
including information obtained by the U.S. military in Afghanistan.
That information was entered into Custom's ``watch list,'' which,
when cross-checked against inbound flight manifests, identified
Shishani.
In addition to preventing the cash from reaching its desired
destination, these seizures have provided leads for new investigations
into money laundering, terrorist finance and other criminal activity.
The currency initiative has also resulted in the arrests of several
individuals, including the first to be successfully prosecuted under
the new bulk cash smuggling provisions of the USA PATRIOT Act.
PREPARED STATEMENT OF LARRY D. THOMPSON
Deputy Attorney General, U.S. Department of Justice
October 3, 2002
Chairman Sarbanes, Ranking Minority Senator Gramm, Members of the
Committee, I am pleased to appear before the Committee on Banking,
Housing, and Urban Affairs to discuss issues related to money
laundering, including the 2002 National Money Laundering Strategy and
our progress on the financial front of the ongoing war on terrorism. I
appreciate your attention to this important issue and your interest in
the Administration's ongoing efforts to refine our battle plan against
domestic and international money laundering.
Initially, I would like to thank the Members of this Committee, as
well as all of the Members of Congress, for your efforts in developing
and passing two landmark pieces of legislation in prompt response to
the threats that our Nation has encountered over the past year. The USA
PATRIOT Act, passed in response to the reprehensible attacks of
September 11, provided those of us whose mission it is to protect the
people of the United States with a wide array of new measures that will
serve to enhance our ability to carry out this work. The Sarbanes-Oxley
Act of 2002, passed in response to the threat to our economic well-
being posed by corporate criminals, was a signal to those who seek to
cheat hard-working Americans that these kinds of actions will not be
tolerated. You should be proud of your accomplishments in passing these
extraordinary bills, just as we at the Department of Justice are proud
of our efforts to protect the physical and economic well-being of the
people in this country.
As the Members of this Committee are well aware, money laundering
enforcement is a critical component in the fight against all kinds of
criminal activity, whether it be international terrorism, drug
trafficking, health care fraud, or white collar crime. It makes no
difference whether money is the motive of the crime, as it is in the
case of drug trafficking and fraud, or whether money is the fuel that
powers the engine, as it is in the case of terrorism. Money is the key,
and money laundering and other financial investigations allow us to
unlock the doors to these criminal organizations and provide us a road
map that ties together the links in the criminal organization. In cases
where profit is the motive, following the money forward leads to those
who seek to profit from their crimes. In terrorism cases, following the
money backward leads to those who developed or planned the terrorist
attacks. A graphic example of this principle was provided by our
efforts following the attacks of September 11, where the financial
trail provided the first links in our efforts to unravel the plot that
led up to those attacks.
Our country faces a multitude of threats during these challenging
times, threats that law-abiding, hardworking Americans should not have
to face, yet they do. International terrorists seek to undermine our
security. Drug traffickers seek to
poison the minds and the bodies of our children. Organized crime groups
seek to corrupt our businesses and institutions. Corporate criminals
seek to undermine our economic well-being. But we do not shrink from
these challenges. In fact, they inspire us to work even harder, because
the American people deserve to live their lives in a safe and secure
world, and it is our duty to provide that safety and security for them.
Those challenges inspire us to strive for new and better ways to
utilize our resources, and to use our limited resources in the most
effective manner that we can.
The first step in marshaling our forces to confront a challenge is
to develop a strategy. In the case of money laundering, the development
of a strategy was mandated by Congress in 1998 with the passage of the
Money Laundering and Financial Crimes Strategy Act of 1998. This Act
(codified at Title 31, United States Code, Sec. 5340 et seq.) requires
the President, acting through the Secretary of the Treasury and in
consultation with the U.S. Attorney General, to develop a national
strategy for combating money laundering and related financial crimes.
The first National Strategy was issued in September 1999. The 2001
Strategy was due to be presented to the Congress on September 12, 2001.
The horrific events of September 11 and the legislative and law
enforcement responses to it have obviously changed our approach to the
Strategy. The 2002 Strategy reflects some of those changes. In addition
to the five goals that comprised the 2001 Strategy, a sixth goal--
addressing terrorist financing--was added. The 2002 National Money
Laundering Strategy was issued on July 25, 2002 and, as with all the
previous Strategies, was signed by the Secretary of the Treasury and
the U.S. Attorney General.
The prevention, investigation, and prosecution of money laundering
crimes pre-
sent unique challenges. Money itself is not contraband. The background
circumstances surrounding the source, movement, and destination of the
money must be ascertained to make such a determination and must be
proven in court to convict someone of a money laundering offense.
Furthermore, because money laundering encompasses all different kinds
of criminal activity, the methods of money laundering will vary
depending on the nature of the criminal activity that generated the
illegal proceeds or that the money laundering is furthering.
The 2002 National Money Laundering Strategy, building upon the
previous Strategies, makes significant strides in advancing our battle
plan against money laundering and, in fact, addresses some formidable
issues head-on. In Goal One, the Strategy confronts the issue of
defining the scope of the money laundering problem and the development
of measures of effectiveness. Goal Two addresses the critical issue of
terrorist financing. I will discuss the Department's progress on this
front in more detail later in my testimony.
Goal Three constitutes the core of the 2002 Strategy for purposes
of law enforcement. This Goal sets forth what the Department believes
are the major challenges in attacking money laundering. The first
Objective of Goal Three is to enhance interagency coordination of money
laundering investigations. Because money laundering encompasses all
kinds of criminal activity, all of our major law enforcement agencies,
as well as State and local law enforcement agencies, are involved in
money laundering enforcement. The first priority in this regard is to
establish an interagency targeting team to identify money laundering-
related targets for priority enforcement actions. This interagency
targeting team has already been created and has met on several
occasions. The purpose of this group is to identify those organizations
or systems that constitute significant money laundering threats and to
target them for coordinated enforcement action. This will ensure that
all of our law enforcement agencies are focusing their resources on the
most significant targets in a coordinated manner.
The second priority in Goal Three is to create a uniform set of
undercover guidelines for Federal money laundering enforcement
operations. Our well-intended agents in the field are sometimes limited
in conducting joint undercover operations because they must follow
different agency guidelines. These guidelines are not arbitrary or
archaic; they are carefully drafted guidelines to address policy
concerns of the agencies, but sometimes they address these concerns in
different ways. If we can find ways to overcome these differences or
develop uniform guidelines that address the concerns and priorities of
all of the agencies, our efforts in conducting these
operations will be significantly enhanced.
The third priority of Goal Three is to work with U.S. Attorneys'
Offices to participate in Suspicious Activity Report (SAR) Review Teams
where they do not currently exist but could add value. These SAR Review
Teams are another vehicle for promoting interagency coordination. SAR's
have been proven useful for identifying
targets or trends in money laundering activity, and each law
enforcement agency utilizes the SAR's. However, we have found that when
an interagency task force is created to review the SAR's in a
coordinated manner, the value of the SAR's is enhanced even further and
investigative priorities can be identified and coordinated. DOJ and
Treasury are both promoting the value of these SAR Review Teams to the
investigators and prosecutors in the field. I am proud to say that,
according to an Internal Revenue Service survey of its SAR Review
Teams, U.S. Attorneys' Offices participate in 37 of the 41 Teams that
have been established nationwide.
Objective Two of Goal Three focuses on the High-Risk Money
Laundering and
Related Financial Crime Area (HIFCA) Task Forces. The first four
HIFCA's were designated in the 2000 Strategy based on recommendations
made by an inter-
agency working group. The first four HIFCA's were New York/New Jersey,
San Juan, Puerto Rico, Los Angeles, and a ``systems'' HIFCA based in
Texas and Arizona focusing on the issue of bulk movements of cash. In
2001, Chicago and San Francisco were designated as HIFCA's. The HIFCA
concept was another attempt to coordinate the resources of all of the
law enforcement and regulatory agencies in a jurisdiction on the most
significant money laundering targets or threats in the region. While a
number of issues have hampered the HIFCA's from reaching their true
potential, the 2002 Strategy will have DOJ and Treasury reviewing the
HIFCA program and refining the mission, composition, and structure of
the HIFCA Task Forces, so that they can fulfill the mission that was
intended for them.
With regard to Goal Two of the Strategy, we have no greater
priority than the prevention of further terrorist acts against our
citizens. We believe that the use of every tool in our arsenal is
necessary to do that, and terrorist financing enforcement, one of the
focuses of this Committee, is key. By ``terrorist financing
enforcement,'' I mean the use of financial investigative tools to
identify and prosecute persons involved in terrorist plots anywhere in
the world. If we can identify would-be terrorists through financial
techniques, or prosecute them for traditional financial crimes, or
target their supporters and operatives with the crime of terrorist
financing, we will be preventing violent attacks that may otherwise
occur. We may never know exactly how many lives we saved, but we will
certainly not be merely reacting to terrorism that we and the other
parts of the Government failed to thwart.
The Department of Justice's terrorist financing enforcement efforts
are centered around two components the Attorney General established in
the aftermath of September 11. Within the Criminal Division, we created
the DOJ Terrorist Financing Task Force, a specialized unit consisting
of experienced white-collar prosecutors drawn from several U.S.
Attorneys' Offices, the Tax Division, and some litigating components of
the Criminal Division, such as the Fraud Section, the Office of
International Affairs and the Asset Forfeiture and Money Laundering
Section. This Washington-based team of prosecutors works with their
colleagues around the country, using financial investigative tools
aggressively to disrupt groups and individuals who represent terrorist
threats. These attorneys also work closely with the FBI's Financial
Review Group, the Foreign Terrorist Tracking Task Force, and the
Treasury Department's ``Operation Green Quest,'' which are developing
preventive and predictive models and using advanced algorithms to mine
data and identify terrorist suspects.
In the field, the Attorney General created 93 Anti-terrorism Task
Forces (ATTF's) to integrate and coordinate antiterrorism activities in
each of the judicial districts. Each ATTF is headed by a veteran
Assistant United States Attorney from each district, and includes
Federal, State and local members of the district's Joint Terrorism Task
Forces (JTTF's), the successful FBI program which serves as the ATTFs'
operational arm. The ATTF program is managed by six National Regional
Antiterrorism Coordinators from Main Justice, who work closely and
share office space with the Terrorist Financing Task Force. How does
this structure add to prevention? To appreciate this, one has to
understand the terrorist financing laws, investigative tools, and
information-sharing protocols, some of which were--thanks to Congress--
enhanced by the USA PATRIOT Act.
First, the criminal laws relating to terrorist financing are a
powerful tool in enhancing our ability to insert law enforcement into
terrorist plots at the earliest possible stage of terrorist planning.
For example, it is now a crime for anyone subject to U.S. jurisdiction
to provide anything of value--including their own efforts or
expertise--to organizations designated as ``foreign terrorist
organization.'' It does not matter whether the persons providing such
support intend their donations to be used for violent purposes, or
whether actual terrorism results. If someone subject to U.S.
jurisdiction provides, or even attempts to provide, any material
support or resources to Hamas, Hezbollah, Al Qaeda, the Abu Sayyaf
Group, or any of the other 34 designated groups, that person can be
prosecuted in the U.S. courts. Our prosecutors need not prove that the
support actually went to specific terrorist acts.
This statute was used in the Charlotte, North Carolina Hezbollah
case, the John Walker Lindh matter, the recent New York indictment of
supporters of Sheik Rahman, and the actions we took over the last few
months in Seattle, Detroit, and Buffalo. It is a powerful preventive
tool. The Terrorist Financing Task Force is
aggressively promoting this enforcement strategy, and it is available
to help U.S. Attorneys' Offices and ATTF's where circumstances arise in
the districts that may justify these charges.
Second, the financial investigative tools at our disposal, which
have been refined over the years for use in combating money laundering,
can be employed in terrorist financing enforcement. Money laundering--
the process by which dirty money is transformed into seemingly
legitimate proceeds--depends on financial transactions, which can now
be identified through various Bank Secrecy Act reports that are
required of the private financial community. The financing of
terrorism, though it involves the opposite process--otherwise
legitimate money being applied to dirty purposes--may be revealed by
those same reports. To the extent we succeed in raising the global
standards for money laundering prevention or enacting tools that help
our own efforts in this area, we will be enhancing the world's and our
own ability to stop terrorist financing. In this sense, terrorism
prosecutors are money laundering prosecutors. They share the same
expertise.
Another criminal statute that was enhanced by the USA PATRIOT Act
was Section 1960 of Title 18, prohibiting unlicenced or unregistered
money remitters. This revised statute was used successfully in the
District of Massachusetts. On November 14, 2001, a Federal grand jury
in Boston returned an indictment charging Liban Hussein, the local
President of an al Barakat money remitting house, and his brother,
Mohamed Hussein, with a violation of Sec. 1960. This prosecution was
part of a national, and indeed international, enforcement action
against the al Barakat network. On April 20, 2002, Mohamed Hussein was
convicted of this offense and he was recently sentenced to 18 months'
incarceration for operating an unlicenced money remitting business.
Finally, we are now enjoying an unprecedented level of cooperation
and information sharing between and among U.S. Government agencies
involved in counter-
terrorism, due in part to important changes made by the USA PATRIOT
Act. As the Committee knows, prior to last October, there was no
mechanism for sharing certain types of criminal investigative material
with the intelligence community, and the intelligence community could
not open their files to law enforcement. Such sharing was possible, but
only in clearly-delineated situations and following very
exacting procedures. For terrorist financing enforcement, the loosening
of these rules--particularly when it involves information about
terrorist financial supporters living in the United States--will be
invaluable. Although this is only a small subset of information
relevant to terrorist financing, it will assure that we are using the
full spectrum of information from all sources to prevent future attacks
before they occur, from open source to highly sensitive classified
information.
The structure we have in place both in Washington and the field to
focus on terrorist financing enforcement will maximize the
effectiveness of these tools. Where law enforcement and intelligence
intersect, information-sharing with field office components necessarily
involves their interaction with Washington. The Terrorist Financing
Task Force can access and provide information to the ATTF's that they
might not otherwise have, while providing a wider perspective on
developing trends and joining disparate districts that may have pieces
of the same puzzle without knowing it. This role is in addition to the
legal expertise and litigation support we have gathered here at Main
Justice for the specific purposes of ensuring that the terrorist
financing enforcement option is a robust one that can be used by those
senior government officials in charge of our war on terrorism.
No discussion about money laundering would be complete without a
discussion about drug money and our efforts to stop it. In the words of
then-Associate Attorney General Stephen Trott in 1987, and who now sits
on the U.S. Court of Appeals for the Ninth Circuit, ``[i]t is not
enough to follow drug trails; it is also necessary to follow the money
in order to reach high levels in drug organizations.'' No one can tell
us definitely how much drug money is laundered in the United States--
but we do know that users in the United States spent at least $63
billion dollars on drugs last year. Since assuming the office of Deputy
Attorney General, I have made the Organized Crime Drug Enforcement Task
Forces (OCDETF) the centerpiece of the Department's efforts to attack
the supply side of the drug problem. The Attorney General and I
announced this last March a new strategy to use OCDETF to go after the
entrenched and significant drug trafficking and drug money laundering
groups. Integral in this strategy is the use of money laundering
charges, financial investigations, and forfeiture. In fact, new
guidelines issued to the U.S. Attorneys' Offices now require that each
OCDETF investigation must contain a financial component, and that the
results of those investigations must be documented. I can assure you
that we will be closely reviewing the results of these investigations
in order to use our scarce resources in the most efficient way
possible. Likewise, the Special Operations Division, a multi-agency
operation consisting of DEA, the FBI, Customs, the IRS, and prosecutors
from the Criminal Division, has a special money laundering unit
dedicated to a strategy of targeting the command and the control
elements of major drug money laundering groups. It is the best strategy
we have to deal with organized money laundering groups, and its success
has been demonstrated time and again.
Conclusion
I would like to just conclude by expressing the appreciation of the
Department of Justice for the continuing support that this Committee
has demonstrated for the Administration's anti-money laundering
enforcement efforts.
Mr. Chairman and Members of the Committee, thank you for this
opportunity to appear before you today. I look forward to working with
you as we continue the war against terrorist financing and all forms of
money laundering, and to refine our Strategy to address these serious
threats. I would welcome any questions you may have at this time.
PREPARED STATEMENT OF STUART E. EIZENSTAT
Former Deputy Secretary, U.S. Department of the Treasury
October 3, 2002
Chairman Sarbanes, Senator Gramm, and Members of the Committee,
good morning. It is a pleasure for me to appear before this Committee
once again. I am glad to see you Mr. Chairman, and to have one more
opportunity, Senator Gramm, to testify before you as you end your long
service.
As this Committee has recognized, dealing effectively with money
laundering is not only essential to the fight against narcotics
trafficking, organized crime, and foreign corruption, but also it is
critical to our national security and demands our ongoing attention.
So, I am very pleased that the Committee is embarking on a continuing
oversight role in this area.
In the last year, we have watched our Government and its allies
conduct a financial war on terrorism, as part of its broader war on
terrorism. Words such as ``hawala'' or ``al Barakat'' have become
staples of the nightly newscasts.
In acting against financial aspects of terrorism, the Departments
of the Treasury, State, and Justice have made use of an enforcement and
policy infrastructure built up over several decades. It is well to
review the history again. The Bank Secrecy Act was a product of the
Nixon Administration, and the statute making money laundering a
distinct and very serious felony in the United States was the product
of the Reagan Administration. The first Bush Administration led the way
in creating the Financial Action Task Force (FATF), at the G7 Summit in
1989, and establishing the Financial Crimes Enforcement Network
(FinCEN) at the Treasury a year later, and President Bush signed the
Annuizio-Wylie Anti-Money Laundering Act in 1992; that landmark
legislation authorized suspicious transaction reporting and uniform
funds transfer recordkeeping rules, among other pillars of today's
counter-money laundering programs in the United States and around the
world. President Clinton used the occasion of his nationally televised
address on the occasion of the United Nations 50th anniversary to call
for an all-out effort against international organized crime and money
laundering, kicking off a coordinated 5-year effort to bring the
world's mafias and cartels to heel and finally to close the gaps in our
laws and regulatory systems that had permitted these criminal groups to
thrive.
My testimony draws on my collective experience serving during the
1990's in the Departments of Commerce, State, and Treasury. I want to
also note that I am currently a member of a Council on Foreign
Relations Independent Task Force on Terrorist Financing, chaired by
Maurice Greenberg, Chairman & CEO of American International Group, and
my participation in the work of that Task Force has informed and
reinforced my views; I wish to make clear, however, that I am
testifying here today in a personal capacity, and not on behalf of the
Task Force. The Task Force is expected to issue its report later this
month.
The Bush Administration has made important advances in dealing with
money laundering and antiterrorism funding. Some terrorist funds have
been frozen. Organizations and individuals who support terrorism have
been designated and our allies have helped block their accounts. But
the Bush Administration has barely scraped the surface of what needs to
be done. There is still no genuine strategy to attack money laundering
and money launders. Our Government is still not properly structured
internally to focus priority attention on terrorist financing. There is
no existing international entity to work exclusively on locating and
blocking terrorist money. And we have not applied the kind of pressure
we must to convince nations in the Middle East and Persian Gulf, who
are the principal locations and transit points for terrorist
financings, to bring their laws and practices on money laundering up to
international standards and to cooperate fully with our law enforcement
authorities. Until these steps are taken to shut down the financial
sources of terrorism, the Nation will remain vulnerable. Let me
explain.
Money laundering is simply the hidden movement of funds derived
from crime, funds intended for illegal purposes, or--most likely--both.
There are as many ways to hide the movement as there are ways to
conduct other transactions. They range from simple smuggling, through
trust-based remitters of cash, to sophisticated banking transactions
using correspondent accounts, chains of corporate and trust ownership,
and shell nominees, all to obscure where money comes from and where it
goes. There are particular means that can be associated with particular
groups--in the case of the al Qaeda and other Islamic terrorists, for
example, reliance has been placed on the movement of funds in part
through purported charities--some of which may actually be charities in
whole or part--and the use of Islamic banking networks. Narcotics
traffickers make significant use of the Black Market Peso Exchange, to
convert large amounts of currency in the United States to export goods.
There are also particular mechanisms or systems that all money
launderers use and that are susceptible to abuse by them. Some of
these--for example shell banks and unpoliced correspondent banking
relationships--are addressed in the landmark legislation the Committee
shepherded through the Congress last year. Others, offshore banking
systems, differing degrees of regulatory infrastructure among states,
and the very fact of the emergence of a global financial system, are,
at the moment at least, facts of international financial life.
Our law enforcement and intelligence systems are historically
designed to track money through the financial system, so that we can
identify, interdict, or prosecute particular criminals, including
terrorists. But fighting money laundering means more than that. It
requires Government at all levels to seek to throw sand in the gears of
criminal money movement systems, wherever and whenever it can.
Our efforts against terrorist funding provide a good example, and I
want to discuss them in detail for that reason. According to the
Treasury Department, since the September 11 attacks, $112 million in
assets of terrorists and their supporters worldwide have been frozen,
$34 million of which are in the United States, and $78 million
overseas. Over 165 countries have issued blocking orders, and over 80
countries have or are beginning to implement new laws to curb terrorist
financing. The Government has disrupted several hawalas, and
established a new registration system for such ``money service
businesses,'' and has frozen the assets of key charitable organizations
tied to al Qaeda.
We have disrupted but not dismantled al Qaeda's financial network.
During the Clinton Administration we established that the bulk of al
Qaeda's wealth did not come from Osama bin Laden's inherited personal
fortune, but rather from multiple sources and was distributed through
multiple sources. Its money comes from both businesses cloaked with the
mantle of legitimacy and from criminal activities, from petty crimes to
the heroin trade in Afghanistan. But its principal source of money
comes from its fundraising activities through ``charities,'' mosques,
financial institutions, and intermediaries. Charities and individuals
in Saudi Arabia have been the most important source of its funding. The
Clinton Administration sent two missions to Saudi Arabia and the Gulf
to enlist their support in shutting down these charities. We received
virtually no cooperation.
Just as al Qaeda uses multiple sources to raise money, it
distributes it through multiple channels, from the global financial
system to a network of underground, unregulated hawalas and Islamic
banks. The organization's decentralized nature means there is no one
single source which can be frozen.
Thus, at what might be called the ``theatre'' level--somewhere
between particular investigations, on the one hand, and true Strategy
on the other--significant successes have been achieved. But I am less
optimistic that we have a long-term strategy for sustaining the
progress that has been made. Formulating and implementing that Strategy
will be the challenge for the Administration in the coming months. This
Strategy must involve both organizational changes and diplomatic
initiatives.
First, on the organizational side, dealing with terrorist funding
involves regulatory and diplomatic as well as investigative approaches.
That means effective
coordination over time across several branches of our Government, to
``working'' the issue in all its guises, and to convincing others to do
so. The Interagency Policy Coordination Committee on Terrorist
Financing, chaired by Treasury's General Counsel has made strides in
this direction, but it is not institutionalized and does not appear to
possess clear lines of authority. We must have a high-level coordinator
within the U.S. Government, with the President's ear, to focus the U.S.
Government's attention on terrorist financing. The Council on Foreign
Relations Task Force will have more to say on this shortly. Within our
own Government we need to assure that all of our regulatory
information, especially the new information about money services
businesses, is available in a coordinated fashion to all of the
relevant agencies, and that those businesses are examined for
compliance with the new regulatory controls.
Second, we must ensure much greater attention at the international
level to the problem of money laundering in general and terrorist
funding in particular.
The Financial Action Task Force (FATF) has done a good job of
placing an international spotlight on those countries which do not meet
international standards in dealing with money laundering--and can thus
be misused by terrorist groups to launder their money. During the
Clinton Administration, we began important elements of the dual track
policy of tracking terrorist funds and working to upgrade international
counter-money laundering standards that the second Bush Administration
is carrying forward. We placed designated foreign terrorist
organizations on the economic sanctions list in 1995 and on an expanded
basis, to include al Qaeda and other bin Laden-linked groups, in 1998.
As a result, the Treasury froze about $250 million in Taliban assets
that year. We sent senior officials to the UAE, Kuwait, Bahrain, and
Saudi Arabia in July 1999 and again in August 2000 to look at questions
of bank and charitable organization involvement in terrorist funding.
Even more important, we pushed forward the FATF's noncooperative
countries and territories project in the Clinton Administration's last
2 years. Fifteen nations were cited as being noncooperative in the
international fight against money laundering in 2000,\1\ and the
Treasury followed up the FATF's action and its own analysis by issuing
hard-hitting advisories to our financial institutions recommending
enhanced scrutiny against potential money laundering transactions
involving those nations. The reaction was very positive. FATF's efforts
can be credited for the fact that in the last few years anti-money
laundering laws have been passed in Bahrain (January 2001), Lebanon
(April 2001), the United Arab Emirates (January 2002), and Egypt (May
2002). Panama, Israel, and Liechtenstein took important steps in
bringing their laws up to international standards and were removed from
the list.
---------------------------------------------------------------------------
\1\ The list of noncooperating countries and territories in 2000
was: the Bahamas, the Cayman Islands, the Cook Islands, Dominica,
Israel, Lebanon, Liechtenstein, Marshall Islands, Nauru, Niue, Panama,
the Philippines, Russia, St. Kitts and Nevis, and St. Vincent and the
Grenadines. The Bahamas, the Cayman Islands, Liechtenstein, and Panama
were removed from the list in June 2001, after curing most of all of
the deficiencies FATF cited, and eight new countries--Egypt, Grenada,
Guatemala, Hungary, Indonesia, Myanmar, Nigeria, and Ukraine--were
added to the list in June and September 2001. In June 2002, Hungary,
Israel, Lebanon and St. Kitts and Nevis were removed from the list,
leaving the following 15 countries: Cook Islands, Dominica, Egypt,
Grenada, Guatemala, Indonesia, Marshall Islands, Myanmar, Nauru,
Nigeria, Niue, Philippines, Russia, St. Vincent and the Grenadines, and
Ukraine.
---------------------------------------------------------------------------
But this important multilateral initiative seems to have hit a
snag. I am concerned that the Bush Administration may be retreating
from the strong effort to identify noncooperative countries, those with
seriously substandard money laundering controls and seemingly little
political will to change them. It was reported last week that FATF is
planning to agree this month to suspend for at least 1 year its
practice of identifying noncooperating countries.\2\ This would be a
serious mistake. The plan to abandon the blacklisting practice
contemplates an increased role by the IMF and the World Bank in
persuading countries to adopt or enhance their money laundering laws
and regulations. Hopefully the Bush Administration will continue to
identify and publicize noncomplying nations through the FATF process
while also encouraging a greater role for the IMF and the World Bank.
---------------------------------------------------------------------------
\2\ Edward Allen and Alan Beattie, ``Blacklist of `dirty money'
havens put on temporary hold,'' Financial Times, September 26, 2002.
---------------------------------------------------------------------------
FATF is only part of the solution. There is no international
organization dedicated solely to tracking terrorist funds. We should
work with our G7/G8 partners to create such an organization, working
parallel to FATF. Again, the Greenberg Task Force of the Council on
Foreign Relations will have detailed recommendations here which are
still being finalized.
The Administration needs to place the issue of terrorist funding on
the regular agenda of every major international event, like APEC and
ASEAN, and the twice annual EU-U.S. Summits. The Senior Level Group
which plans these Summits can serve as a regular ``scorecard'' to
monitor our success. Unless our EU allies and their banking systems
employ the same approach we have, and maintain the degree of political
commitment necessary to achieve financial transparency in these areas,
the value of the U.S. Government's work with U.S. financial
institutions will be greatly reduced.
The EU countries have taken positive steps to cooperate in tracking
down terrorist funds. But the robustness of European regulators may not
match the strength of their anti-money laundering laws. The EU, for
example, only bars funding by the military wing of Hamas, not its
civilian wing, when, in fact, they are all one organization, dedicated
to terror. Likewise, EU nations do not forbid Hezbollah funding at all.
Their high evidentiary standards make it difficult to block assets. And
their porous borders invite the transit of terrorist funds.
We must continue to place financial transparency and the building
of strong supervisory institutions conforming to international
standards on the agenda of our bilateral and multilateral discussions
with nations all over the world. It must be--as it appears not to be
now--a major talking point for the President in his meetings with
foreign leaders.
If more effort is needed with the EU, special efforts must be made
with countries like Saudi Arabia, Pakistan, and the Gulf States, which
are the principal sources and transit points for terrorist money. Their
anti-money laundering laws are weak and their follow-up no better. They
do not deserve the diplomatic pass the Administration appears to give
them. If we really want to put sand in the gears of al Qaeda we must
press them to cooperate in dealing with the phony charities and
individuals who support al Qaeda, and to come up to international
standards on money laundering. We must speak plainly and bluntly in the
face of noncooperation. In
nations for which modern financial supervision and financial
transparency are relatively new concepts, a paper commitment, or even a
one-time series of arrests, is not the same as sustained enforcement
and regulatory change.
Third, we cannot stint on technical and development assistance to
help nations build the technical capacity to supervise their financial
systems adequately. The President's fiscal year 2003 budget allocates
only a few million dollars to assistance in these areas; far less than
is necessary if we expect countries to gain control over the misuse of
their financial institutions and rogue charities.
Fourth, we need to bring the underground hawala system into the
Federal regulatory system and we need to simultaneously urge other
countries to regulate and to control them.
Fifth, we cannot leave the job to others, even to our allies.
Without strong continuing U.S. leadership our progress will be
marginal.
We cannot hesitate to employ stronger measures than diplomacy when
necessary. Last week, several House Members expressed disappointment
that the Administration had made no use of the authority granted to the
Treasury by Section 311 of the USA PATRIOT Act to identify certain
aspects of terrorist financing as items of ``primary money laundering
concern'' requiring special reporting, regulatory, or other measures,
and I share the question they raised. This will allow sanctions short
of a Presidential declaration under IEEPA blocking orders. In the same
way, we will need to continue to use our economic sanctions authority
where appropriate to freeze potential terrorist funds.
These observations reflect a basic premise--that dealing with
terrorist financing requires ``structure, integration, and focus'' both
within our Government and between our Government and its allies. The
same is true of dealing with money laundering generally.
As I indicated, many of the same issues can be raised about other
money laundering problems. When I spoke for the Treasury at the public
issuance of the first National Money Laundering Strategy in 1999, I
emphasized that:
``This Strategy reflects a national commitment to a
coordinated, effective fight against money laundering. The
action items it sets forth obviously cannot be
accomplished all at once. Rather, they are meant to lay out a
framework for prompt, aggressive action.''
What I see potentially lacking in our approach now is that
``framework.'' As the Chairman noted, 26 agencies contributed to the
current National Money Laundering Strategy. And each no doubt had
something valuable to add. But it is not easy to detect a guiding
direction underneath the particular actions listed. I do not see
``structure, integration, and focus.''
Some of the same criticism could have been directed to our first
Strategy, which was written at a less difficult time. But I think we
could have met the criticism then by pointing to a consistent strategic
thread that continues to be the necessary thread today:
Working against money laundering systems and high-risk problem
areas, at the particular ways criminals and terrorists move funds;
Coordinated enforcement and regulatory activity;
Leveling the playing field among financial institutions, so
that money launders are not free to abuse some more than others;
and
Making, and keeping, money laundering on the international
agenda.
A final element of our Strategy was ``persistence'' and follow-
through--the recognition of the fact that it was far easier to state
these goals than to achieve them. In drafting the first strategy we
recognized--and intended--that institutional arrangements--a
framework--would follow and be knit together by particular initiatives.
That our work would, as I said before, be characterized by the need to
learn to operate in a strategic way.
That has not happened and it will not happen quickly. As the public
record of our efforts to deal with terrorist financing shows,
coordination is possible and can be effective--if it is
institutionalized and pressed forward. I am less certain that the
terrorism experience has been replicated in dealing with other money
laundering issues--because other issues intervene, or simply because no
one is responsible for making things happen. I think we are still where
we were 4 years ago--with an idea of what we would like to have happen
but without any clear plans or institutional arrangements to make it
happen.
I am especially pleased that this Committee intends to continue to
follow this issue closely, as it is demands our utmost attention. I
would be happy to answer any questions.
PREPARED STATEMENT OF ELISSE B. WALTER
Executive Vice President, Regulatory Policy and Programs
National Association of Securities Dealers
October 3, 2002
Introduction
On behalf of NASD, I would like to thank Chairman Sarbanes, Ranking
Member Gramm, and the Members of the Senate Banking Committee for this
opportunity to testify.
I am here today to tell you about measures the NASD has taken to
assist in the implementation of the International Money Laundering
Abatement and Financial Anti-Terrorist Act of 2001, which is Title III
of the USA PATRIOT Act.
My appearance comes almost a year after the enactment of the USA
PATRIOT Act--a year during which the NASD has worked closely with the
Securities and Exchange Commission, the Treasury Department, other
regulators, and members of the securities industry to begin
implementation of those aspects of the USA PATRIOT Act that apply to
broker-dealers.
Overview
Let me begin with a brief overview of NASD--because knowing our
mission and how we operate will help you understand NASD's role under
the USA PATRIOT Act. As the world's largest self-regulatory
organization (SRO), NASD has been helping to bring integrity to the
markets for more than 60 years. Investor protection and market
integrity are at the core of NASD's mission and are the foundation of
the success of U.S. financial markets.
Under Federal law, every securities firm doing business with the
American public is required to be a member of NASD. Currently, roughly
5,500 brokerage firms, 90,000 branch offices, and over 670,000
registered securities representatives come under NASD's jurisdiction.
NASD writes rules that govern the behavior of securities firms.
These rules become final upon approval by the SEC. The NASD examines
firms for compliance with these rules (as well as for compliance with
SEC rules and the Federal securities laws), investigates possible
violations of securities laws and regulations, and disciplines members
and their employees when violations occur. NASD also is responsible for
professional training, licensing and registration, dispute resolution
and investor education.
While our regulatory jurisdiction is limited to our broker-dealer
member firms and their associated persons, our examinations,
surveillance, and regulatory intelligence alert us to illegal conduct
outside of our jurisdiction. We routinely refer such findings to the
SEC, the States, and criminal prosecutors for their action. We provide
technical assistance to Federal, State, and local prosecutors and
agents throughout the country on matters within our regulatory
expertise. More than 200 defendants have been convicted of felonies in
cases where we assisted criminal authorities. These matters have
included not just ``traditional'' securities fraud, but also cases
involving organized crime, money laundering, and most recently
terrorist financing.
Money Laundering and the Securities Industry
Prior to the passage of the USA PATRIOT Act, NASD had some
experience overseeing the securities industry's compliance with anti-
money laundering regulations. Broker-dealers have long been subject to
the reporting requirements of the Bank Secrecy Act. For example, in
July 2001, NASD Enforcement filed a complaint against a registered
representative who worked with a securities firm affiliated with a
large U.S. banking company, alleging that she, among other things, had
structured currency transactions to evade Federal reporting
requirements and had caused her
employer (an NASD member firm) to fail to file a currency transaction
report, as required by the Bank Secrecy Act.
In that case, the firm had a policy of prohibiting representatives
from accepting cash from customers. The firm, however, also had anti-
money laundering policies and procedures in place to ensure compliance
with the Bank Secrecy Act, including the filing of currency transaction
reports, in the event that a cash transaction occurred. Despite the
firm's prohibition, the registered representative agreed to accept
$50,000 in cash from a customer. When the customer insisted that the
representative not report the transaction, the representative agreed to
structure the deposits into an account in the name of the customer's
mother through cashier's checks in increments below the threshold for
reporting.
In August of this year, NASD's Office of Hearing Officers issued a
decision in the case, finding the registered representative liable for
structuring and for causing her firm to fail to file a currency
transaction report. NASD barred this representative from being
associated with any NASD member firm in any capacity. (See Press
Release at http://www.nasdr.com/news/pr2002/release_02_048.html.) NASD
was able to enforce the Bank Secrecy Act regulations under NASD Rule
2110, which obliges firms and associated persons to ``observe high
standards of commercial honor and just and equitable principles of
trade.''
Nonetheless, prior to passage of the USA PATRIOT Act, the
securities industry had limited experience with anti-money laundering
regulations. While subject to the Bank Secrecy Act reporting
requirements, most securities firms, as a matter of policy, prohibit
cash transactions. Many broker-dealers, therefore, do not have the
experience of filing currency transaction reports. And although NASD,
since as early as 1989, has recommended that all broker-dealers file
suspicious activity reports (SAR's) with the Treasury Department's
Financial Crimes Enforcement Network (FinCEN), only broker-dealers that
were subsidiaries of banks or bank holding companies were required to
do so by Federal law.
Before the tragedy of September 11, NASD participated in a
significant collaborative effort with the New York Stock Exchange
(NYSE) and the SEC to conduct joint examinations of a group of broker-
dealers to determine the scope and the effectiveness of their anti-
money laundering compliance programs. We learned that, although many of
the larger broker-dealers had implemented comprehensive anti-money
laundering procedures voluntarily, most broker-dealers had not
implemented programs that went beyond the reporting requirements of the
Bank Secrecy Act.
NASD Rulemaking Under the USA PATRIOT Act
The USA PATRIOT Act imposes a number of new anti-money laundering
requirements on the securities industry. This is uncharted territory
for many broker-dealers. NASD has worked over the last year to use our
regulatory tools and resources to educate broker-dealers about and
monitor compliance with these new requirements under the USA PATRIOT
Act.
To that end, NASD proposed a new rule, Rule 3011, to establish the
minimum standards for broker-dealers' anti-money laundering compliance
programs, which Section 352 of the USA PATRIOT Act required all broker-
dealers to develop and implement by April 24, 2002. On April 22, 2002,
the SEC approved NASD Rule 3011 and the NYSE's substantially similar
rule, Rule 445.
NASD Rule 3011 requires firms to develop and implement a written
anti-money laundering compliance program that is approved in writing by
a member of senior management and, at a minimum:
(1) establishes and implements policies and procedures that can be
reasonably expected to detect and cause the reporting of transactions
required under 31 U.S.C. Sec. 5318(g) (which governs SAR's) and the
implementing regulations thereunder;
(2) establishes and implements policies, procedures, and internal
controls reasonably designed to achieve compliance with the Bank
Secrecy Act and implementing regulations thereunder;
(3) provides for independent testing for compliance to be conducted
by member personnel or by a qualified outside party;
(4) designates an individual or individuals responsible for
implementing and monitoring the day-to-day operations and internal
controls of the program; and
(5) provides ongoing training for appropriate personnel.
After the SEC approved NASD Rule 3011, the Treasury Department
stated that broker-dealers would be deemed in compliance with the USA
PATRIOT Act requirement to implement an anti-money laundering
compliance program if they were in compliance with NASD Rule 3011 and
NYSE Rule 445.
NASD Rule 3011 allows NASD to examine and enforce compliance with
anti-money laundering program requirements. We began that effort as
soon as the rule went into effect earlier this year. Through our
examinations, we determine whether firms have the required compliance
programs and assess deficiencies in firms' programs. On a firm-by-firm
basis, we determine what action to take after each examination. In
addition, the information we gather through our examinations enables us
to determine areas of common misunderstanding so that we can develop
new guidance for firms to help them comply. We are coordinating with
the NYSE by sharing examination procedures to ensure that, as
regulators, we are following a consistent approach and to make certain
that our procedures are as comprehensive as possible. In addition,
where examinations involve firms that are members of both NASD and the
NYSE, we are coordinating our reviews for compliance with the anti-
money laundering compliance program requirements.
According to our most recent examination results, approximately 94
percent of firms had developed and implemented anti-money laundering
compliance programs. Our goal, of course, is 100 percent compliance,
but the examination results show that firms recognize their
responsibilities and have taken the necessary steps to meet their
obligations under the Act. Those firms that NASD examiners found to be
deficient in this area received a Letter of Caution and, pursuant to
the terms of the Letter of Caution, were required to demonstrate to
NASD examiners that necessary procedures were in place, and
deficiencies corrected, within 30 days. Firms that continue to
disregard their obligations to develop and implement anti-money
laundering compliance programs that contain all the necessary
procedures will face NASD Enforcement actions that could lead to
substantial fines, suspensions, and even expulsion from the industry.
While examining to determine whether firms have proper anti-money
laundering procedures, NASD examiners, at times, have confronted
situations where firms had evidence of suspicious activity but did not
file a SAR. For example, in one instance, an examiner conducting a
routine examination noted signs of suspicious structuring transactions.
The customer, over a period of time and on numerous occasions, had
deposited a total of over $10,000 in money orders into an account. None
of the money orders was for more than $700. The customer then wired
thousands of dollars to a bank located in a foreign country. The firm
had not voluntarily filed a SAR. NASD staff referred the matter to an
appropriate Government agency for review.
As noted, while the SAR reporting requirements do not become
effective until the end of this year, NASD has suggested that firms
make voluntary SAR filings, when warranted. We will continue to be
vigilant during our examinations of our firms and, where appropriate,
refer instances of suspicious activity to the appropriate Federal
authorities.
Additional NASD Anti-Money Laundering Initiatives
NASD has also launched a variety of other anti-money laundering
initiatives to assist firms in developing and implementing their anti-
money laundering compliance programs and in complying with other
aspects of the USA PATRIOT Act.
Notices to Members
NASD has published the following ``Notices to Members''
(Attachments held in Senate Banking Committee Files):
Notice to Members 01-67, Terrorist Activity (October 2001). This
Notice informed members of President Bush's Executive Order freezing
the property of, and prohibiting transactions with, certain
individuals. It explained how members could access the Treasury
Department's Office of Foreign Assets Control's (OFAC) website and
recommended that firms establish compliance programs to avoid
violations and possible enforcement actions.
Notice to Members 02-21, Guidance to Member Firms Concerning Anti-
Money Laundering Compliance Programs (April 2001). This Notice
explained in detail the requirements that the USA PATRIOT Act and NASD
Rule 3011 impose on broker-dealers and provided guidance to assist
broker-dealers in developing anti-money laundering compliance programs
that fit their business models and needs.
Notice to Members 02- 47, Treasury Issues Final Suspicious Activity
Reporting Rule for Broker/Dealers (August 2002). When the Treasury
Department issued its final rule governing SAR's, NASD issued this
Notice to Members to explain the requirements of the rule and to notify
members of the deadline for comments on the proposed SAR's form for
broker-dealers.
Notice to Members 02-50, Treasury and SEC Request Comment on
Proposed Regulation Regarding Broker/Dealer Anti-Money Laundering
Customer Identification Requirements (August 2002). This Notice
explained to members the proposed regulations regarding customer
identification and verification and notified them of the deadline for
submitting comments on the proposed rule.
AML Template
Many smaller securities firms did not have the extensive experience
with anti-money laundering regulations of the large, bank-affiliated
firms, and were uncertain about how the various USA PATRIOT Act
requirements would apply to them. To assist them, NASD developed a
detailed template that firms can use in fulfilling their
responsibilities to establish an anti-money laundering compliance
program. (A copy of the template is being held in Senate Banking
Committee files.)
Congress wisely made the anti-money laundering program requirement
flexible enough so that each firm could tailor its program to the
firm's size, business activities, and customer base. The template,
which firms can download from our website, www.nasd.com, provides
language that firms can tailor to address their particular situations.
Our template urges firms to develop procedures even for those
activities, such as cash transactions, that the firm prohibits. That
way, the firm will have procedures to detect when the policy has been
breached and, if breached, to ensure that the firm complies with any
applicable anti-money laundering regulations.
In addition to giving detailed explanations of the many regulations
and how they would apply to various business relationships and
financial products, the template contains instructions and links to
other resources that are useful for developing an anti-money laundering
compliance program. The NASD template has had over 7,600 visits since
going live in July of this year.
Workshops
NASD also conducted two phone-in workshops for member firms
concerning the USA PATRIOT Act and anti-money laundering compliance. We
held these workshops on April 19 and May 21 of this year and over 1,000
participants called in to join them. We plan to conduct another
workshop this month to address the customer identification and
verification requirements, which firms will have to implement by
October 26. In addition to the workshops for member firms, NASD has
hosted two anti-money laundering workshops for our examiners.
OFAC Search Tool
NASD has created a search tool, which is accessible through NASD's
anti-money laundering website and enables firms to electronically
search OFAC's ``Specially Designated Nationals and Blocked Persons''
list. There have been over 17,000 visits to our OFAC search tool since
its launch in June.
Website Information and Online Training
In addition to our Notices to Members, our template and our OFAC
search tool, our Web page provides links to all of the reporting forms
that firms will need for anti-money laundering compliance, as well as
to various other sources of anti-money laundering information. NASD
attorneys have also participated in numerous speaking engagements to
discuss anti-money laundering issues and to answer firms' questions,
and they will continue to do so at our upcoming Fall Conference in San
Diego and at the NASD Institute in Baltimore.
We have also developed an online anti-money laundering training
course, which firms can use to meet their statutory obligations under
the USA PATRIOT Act and NASD Rule 3011 to develop an on-going anti-
money laundering training program for employees. As of August 31, over
6,000 people had registered for our online training course.
Coordination Between NASD and Government
Coordination and communication with the Treasury Department and the
SEC have been indispensable in this area. Throughout this process, the
Treasury Department and the SEC have provided us with information that
we have needed to
develop anti-money laundering initiatives to assist broker-dealers, and
they have provided helpful and timely comments on our template and the
various publications that we have issued. This has enabled NASD to work
efficiently, to present consistent interpretations and instructions to
the industry and to define our expectations for firms under the
regulations.
Continued coordination among regulators will remain critical in the
future. Significant issues remain concerning how this regulatory regime
that has historically applied to depository institutions will apply to
the securities industry. We are pleased that the Treasury Department
was receptive to hearing about how the application of these proposed
regulations might affect the various participants in the securities
industry, and we look forward to continuing our dialogue with Treasury
on these and similar issues in this very important area.
Conclusion
I am pleased to have this opportunity to share with the Committee
NASD's part of the extensive efforts that have been made over the
course of the last year to ensure compliance with the anti-money
laundering provisions of the USA PATRIOT Act. NASD pledges to continue
to work with Congress, Treasury, the SEC, and other regulators in
implementing and enforcing this important law.
PREPARED STATEMENT OF ALVIN C. JAMES, JR.
Former Senior Money Laundering Policy Advisor
U.S. Department of the Treasury
October 3, 2002
Thank you, Mr. Chairman, Senator Gramm, and Members of the
Committee. I am very pleased to be given this opportunity to return to
your Committee to speak to you today about our Government's anti-money
laundering programs and strategy. My name is Alvin James and currently
I serve as the leader of the Anti-Money Laundering Solutions Group at
Ernst & Young, LLP. However, the views I am expressing here are my own
and do not necessarily reflect the views of Ernst & Young.
A little over 3 years ago, I retired from Federal service after 27
years of law enforcement within the U.S. Treasury Department. Most of
my public service was spent as a Special Agent with IRS Criminal
Investigation Division where I specialized in International Undercover
Money Laundering Investigations. I spent the last 5 years of my Federal
law enforcement service at the Financial Crimes Enforcement Network
(FinCEN) concluding the last 2 years as its Senior Anti-Money
Laundering Policy Advisor. It was at FinCEN that I collaborated on
developing a model that explained what is generally recognized as the
largest money laundering system in the Western Hemisphere--the Colombia
Black Market Peso Exchange (BMPE). That model, which was developed
using law enforcement intelligence, describes how this underground
financial system works and identifies vulnerable choke points. During
my tenure at FinCEN I also served as the founding Chairman of the
Treasury Under Secretary for Enforcement's BMPE Working Group.
Introduction
Mr. Chairman, I believe the current efforts and strategy of our
Government to prevent the laundering of illicit funds or the
transferring of funds for illicit purposes within our borders are
falling short of the mark. This failing is not primarily due to a lack
of diligence on the part of our criminal justice and regulatory
agencies. It stems more from the nature of our enforcement system and
the means by which the performance of our enforcement agencies are
measured than from a basic unwillingness to work together and get the
job done.
The source of this failure lies at a fundamental level. We continue
to fail as a Government to adopt an enforcement strategy to disrupt and
deter the way money is laundered through our nations financial
institutions. The major money laundering is a systemic crime. Systemic
crime is crime brought about by an illicit demand within society that
is not dependant upon the action of any particular individual or group
of individuals. Therefore, the criminal conduct cannot be effectively
deterred by the threat of prosecution, fines, or imprisonment. Systemic
crime is crime that for various reasons will always have a new criminal
ready to step up when his predecessor falls to criminal sanctions.
Systemic crime is not limited to the financial arena. Indeed, there are
broader and more serious areas of crime that also fall within this
definition. When they thrive it is largely do to the choice of our
Government to use the singular weapon of prosecution as our only
deterrent. When we fail to acknowledge the shortcoming of prosecution
as the sole deterrent in critical areas then we also fail to strategize
toward a more effective means of disruption and elimination of the
criminal systems that plague our Nation.
To illustrate my point let us look at two well-known areas of
systemic crime. The demand for narcotics and the systems that fuel that
demand is an example of systemic crime. One of the reasons we have not
done better in fighting the war on drugs is that we continue to pursue
the fight on a case-by-case basis. And yet there seems to be no limit
to drug users, sellers, distributors, smugglers, manufacturers, and
money launderers. The performance of the agencies charged with fighting
the war on drugs is measured by the respective arrests and prosecutions
to their credit. This performance measure of course skews their
strategies in that direction whether or not those strategies have an
ultimate impact on the criminal system. These performance measures also
tend to steer them away from coordinated action with other agencies,
with which they would have to share the credit. Worst of all, they are
dissuaded from the development of a more effective strategic approach
even when they try to do so. We are not winning the war on drugs and
yet we have continued to fight for over 20 years without any sustained
deviation in our strategy.
Our internal war on terrorism and the movement of terrorist funds
is another area of systemic crime. Our efforts to combat terrorism
within our borders seems to be gaining ground because we have not
focused on prosecution as our only tool or even our primary tool to
disrupt and dismantle the terrorist's ability to harm to our country
and our people. Cooperation and coordination of strategy continue to be
key areas of concern. Yet, we seem to recognize that we can offer no
form of prosecution and punishment that will deter an individual who
will give up his own life, not as a sacrifice for his cause, but as a
privilege that will bring everlasting rewards to the individual and
substantial financial rewards to his family? Our law enforcement
community is well-suited to address these terrorist systems, just as
they are well-suited to address the systems that distribute illegal
drugs and launder the profits from their sale. For the war on terrorism
to continue to be effective and for the war on drugs and major money
laundering to begin to have a deterrent effect, the enforcement
community must be unfettered by removing total reliance on performance
measures directed solely toward the arrest and conviction of
individuals. They have the knowledge and expertise to develop
strategies, within the boundaries and individual protections of the
Constitution, which will disrupt and dismantle the principal criminal
systems wreaking havoc in our country today. They must be encouraged to
develop and implement these systemic strategies. We cannot afford to
wait for another 20 years.
Mr. Chairman, by continuing to provide a forum to air these
critical issues. Your Committee is providing the leadership needed to
bring financial criminal enforcement to this new plateau. It is
essential that our Nation begin to recognize the shortcomings of our
current strategies in regard to systemic crime. Only then can we begin
to develop new plans operating outside the box of conventional wisdom.
As I continue in my testimony I will set out numerous areas of systemic
abuse of our Nation's financial structure. These areas of abuse do not
seem to be deterred by traditional means of arrest and prosecution. I
will also suggest an approach to most effectively design and implement
a strategy to combat systemic crime within our enforcement and
regulatory communities. I urge you use the powers of this Committee to
continue to encourage this Nation's financial enforcement and
regulatory community to consider a more effective means of financial
law enforcement and regulation designed to combat these areas of
systemic abuse.
Current State Assessment
As stated, the current focus of financial criminal investigations
is most often on individuals or a particular illicit enterprise. Even
if this focus falls on a particular area of systemic concern, such as
Hawala and its movement of terrorist funds, it still relies on fines or
prosecution of individuals as the primary strategy of deterrence. What
is even more troubling is the spirit of competition rather than
cooperation fostered by these strategies of prosecution. There is
little incentive to cooperate when eventually only one agency will be
credited with the prosecution. If a deal is struck it usually involves
some sharing of the count. This most often involves double counting
which then distorts the statistics and still does little to counter the
systemic abuse.
Similarly, from the civil regulatory perspective, while regulatory
efforts may be aimed at areas of systemic concern, they generally rely
on regulatory sanctions aimed at an individual institution or business.
As in the enforcement community, there seems to be little regard for
whether or not these sanctions will, in fact, impact the particular
area of systemic abuse. Regulation of Money Service Businesses (MSB's)
is a good example of this lack of effective strategy. The first phase
of this regulation is the registration of all MSB's. The most infamous
type of MSB at the moment is the Hawala money remitter system that I
will describe in more detail later. For now, suffice it to say that
even if Hawala brokers in the United States are successfully
registered, such registration is unlikely to impact the illicit use of
this system to move terrorist funds or launder drug money. It is too
easy for this system to hide its dealings inside other transactions.
Registration will certainly not have an impact unless it is part of an
overarching strategy designed to eliminate the illicit use of this
system. It is not clear that such a strategy exists or which agency
would administer it if it did exist. From the criminal law enforcement
perspective, in order to be effective the strategy will have to exceed
reactive prosecution of known illicit transfers through unregistered
institutions. Without effective strategies in place, counting the
number of Hawalas or other (MSB's) that have been registered is
meaningless as a measure of performance for any agency held
responsible, as well as a meaningless measure of effective money
laundering control for our Government as a whole.
There is also little incentive for the enforcement and regulatory
community to cooperate strategically toward a systemic target. The
enforcement community views the regulators, with some justification, as
uncooperative when asked to respond with specific information in regard
to a particular institution or its client. In turn the regulators view
law enforcement, again with some justification, as ham fisted and naive
as to the working of financial institutionsm, as well as their
interactions with their regulators. The financial service sector itself
has also offered little incentive to observe or report systemic abuse
of their systems. Most institutions see the Suspicious Activity Reports
(SAR's) they file on individual behavior as going into a black hole
with little if any feedback as to their relative effect. Once again
they are somewhat justified in this position. Why then would they take
the extra step of pointing out systemic abuse when there has been
little or no effort on the part of Government to describe the abuse or
work with the institutions in a partnership to build a defense?
Mr. Chairman, our National Money Laundering Strategy is replete
with all the right buzzwords--money laundering systems, interagency
cooperation, coordination of effort, and information sharing.
Unfortunately, these strategies have failed to
enhance our ability to deter systemic money laundering. They have
failed because at the root of our efforts we cling to prosecution as
primary tool and our primary measure of success. We must use all the
tools in our tool chest if we are to build a solution to systemic money
laundering.
Areas of Systemic Abuse
Correspondent Banking
International correspondent banking is the network within the
traditional financial sector that facilitates global bank-to-bank
business, as well as providing foreign exchange for clients who do not
have their own individual foreign accounts. Simply stated, foreign
banks maintain accounts similar to checking accounts in banks within
countries that they or their clients wish to do business. Of course,
the United States is essential for any foreign bank wishing to offer
the potential of foreign trade financing to its clients. This network
is especially vulnerable to money laundering because money is taken in
through one governmental jurisdiction and placed in another. The USA
PATRIOT Act began to bring attention to these correspondent
relationships.
However, in spite of this attention, this network is currently
being abused as the primary narcotics currency placement vehicle for
the Colombian Black Market Peso Exchange (BMPE). The traditional means
used to place narcotics currency into U.S. bank accounts controlled by
the BMPE dollar/peso broker was to make small deposits to accounts in
the United States that were less than the threshold of the BSA
regulatory barrier. Due to increased enforcement and regulatory
pressure, the BMPE system has shifted its major currency placement to
the foreign correspondent banking network. Foreign banks, willing to
accept anonymous currency deposits in exchange for either checks or
wire transfers drawn on their U.S. correspondent banking accounts, now
provide the means to place BMPE narcotics currency into the U.S.
financial system. These institutions are located throughout the world
and are certainly not limited to those countries that have been
designated as noncompliant for anti-money laundering purposes.
Once the currency is placed in the U.S. accounts the BMPE brokers
sell the dollars and then transfers them for their clients via checks
and wire transfers. These instruments are used to make payment for
foreign trade and to fund bank and brokerage accounts in the United
States. These transactions completely break the chain of transparency
sought by the world's financial institutions and their respective
governments.
Money Remitters
Numerous other systems similar to Hawala and BMPE exist throughout
the world. They all offer similar services of foreign exchange and
small dollar money remittance through informal networks based on
ethnicity and trust. They exist in Asia, Africa, and South America and
they all have branches in other lands based on the diasporas of their
people. These branches often have brokers who use the traditional
financial systems to maintain their parallel accounts that facilitate
their
informal systems. By their very nature they are also vulnerable to
money launders and individuals who would surreptitiously transfer funds
for illicit purposes.
Gold Broker Networks
The U.S. Government has taken little notice of the workings of
these networks within our country or the world. Nonetheless, it is
possible to transfer millions of dollars of value internationally
within these amorphous networks with no paper trail. The transfers can
go from the souks of Dubai, India, and the Far East to the brokers of
Switzerland and Italy to the coin shops of the United States. As in the
remittance systems, the transfers are made on trust and settlement for
the transfer is usually arranged via parallel transactions going in the
opposite direction. It is very likely that recent transactions of
terrorist funds were moved through this
network.
False Invoicing
This means of covertly moving funds from one country to another has
existed for centuries and is well-known and well-documented. As with
the others mentioned, it remains basically untouched by U.S. law
enforcement. The following is a simple example of the process. A
Colombian drug lord wishing to launder drug currency held in the United
States might first establish a front retail jewelry business in the
United States. Next, green glass is shipped from Colombia to the front
business in the United States and is described as emeralds. The front
company deposits drug currency disguised as business receipts and then
wires out payments for phony emeralds to the Colombian drug lord. The
drug lord has thus transferred his illicit proceeds to Colombia with a
built-in legitimate story disguising their true source.
Remittance Companies
These firms should be distinguished from money remitters in that
they offer discrete international transfers of funds for wealthy
individuals and firms along the lines of the services provided for
private banking clients within the legitimate financial industry. They
do so by moving these funds through their accounts without notice to
anyone of the true ownership of the funds. There may be legitimate
reasons for the existence of these firms such as the need to amass
funds secretly for strategic business advantage. However, due to their
obvious potential to launder money and facilitate other anonymous
transfers, it should not be left totally up to the banking community to
regulate their activity through Suspicious Activity Reporting.
Hawala
Hawala is an ancient system based on trust within ethnic and
familial relationships. It is important to note that this system has
been unregulated for most of its existence. An equally important factor
is that most funds transmitted by this system are legitimate foreign
exchange or remittance transfers. However, it is clear that
illicit funds and funds intended for illicit purposes including
terrorism are also transmitted by this system. It is unlikely that this
amorphous system will lend itself to traditional forms of regulation.
New regulatory and criminal enforcement strategies will have to be
devised based on a more through understanding of the system than we
have today.
Another alternative is to outlaw the system altogether in the
United States. However, an attempt to outlaw this system will only
drive it from the front of the bodega to the back room or the parlor
upstairs. Attempts to outlaw this system will also thwart its
substantial legitimate purposes. One key use is foreign exchange for
the ``unbanked'' third world, thus promoting desperately needed
commerce in these areas. Another important function is money
transmissions to family ``back home.'' In addition to being legal and
harmless this is arguably our most efficient and least costly form of
foreign aid. In any case, as with all the systems described here, this
system exists because there is a demand for it that has not been met
otherwise. As long as the demand exists there will most likely be a
similar system to meet it, whether we try to outlaw it or not.
Colombian Black Market Peso Exchange (BMPE)
The BMPE is perhaps the U.S. enforcement community's best-known
underground money remitter and foreign exchange system. Although it has
technically always been illegal in Colombia, it began as a gray market
designed to evade Colombian import tariffs perceived to be excessive by
the Colombian business community. However, its function became much
more heinous from the international perspective when its source of
funds evolved to be almost exclusively wholesale narcotics proceeds.
Like all underground and unregulated systems this system is
flexible and quickly adapts to efforts to thwart its access to the
world's legitimate financial systems including those in the United
States. I have described a major adaptation of this system in my
previous section on Correspondent Banking. Although this system has
been known to U.S. law enforcement for over 20 years it continues to
adapt and to maintain its status as the vehicle of choice for the
Colombian drug lords to launder over $5 billion dollars per year.
A Proposal
A coordinated effort using all the tools available to the
Government is the key to disrupting and dismantling systemic financial
crime. A home agency solely responsible for systemic criminal law
enforcement and BSA regulatory policy and enforcement is the best means
to achieve this coordination. I strongly suggest the new agency be
given the power via Presidential directive to coordinate all
investigations impacting systems of financial crime that are a threat
to our national security. This power should include investigations in
other agencies that are related to these particular systems. I also
believe it is essential to see that the new agency has the security
clearances necessary to coordinate its strategies with the intelligence
community. Finally, it is vital that this new agency include this
Nation's financial sector as a partner in designing and implementing
overarching strategies designed to impact systemic financial crime.
The problem of overlapping jurisdiction has always been an
impediment to cooperation and coordination of the investigations
related to systemic financial crime. Anti-money laundering is
necessarily a fragmented jurisdiction due to the numerous substantive
crimes that generate illicit funds. However, the recognition of
systemic crime gives rise to a logical division of effort along the
lines of systemic enforcement verses individual prosecution. The agency
I have proposed that would be charged with systemic financial
enforcement could pass off individual cases to the appropriate agency,
thus providing an incentive for cooperation rather than competition. In
addition, the performance of the systemic crime agency could be
measured along the lines of its strategy, which would not directly
include individual prosecution.
As an example of the type of coordinated strategy that might arise
from the
agency I propose, let me turn to the area I know best, BMPE. The goal
of the following strategy is to force the BMPE money launder and the
Colombian drug lord to use processes to launder drug money that are
less suited to their purpose and thus easier to detect and attack by
both systemic and traditional criminal enforcement. First, a
coordinated series of disruption oriented undercover operations could
be added to the strategic plan. These operations can infiltrate the
BMPE money laundering organizations and then use their insider status
at just the right moment to seize or otherwise divert the funds they
have been trusted to launder. Then a BSA Geographic Targeting Order
(GTO) directed at correspondent banking accounts that are funded with
substantial currency deposits. An international arm could be included
that would coordinate the impact of intelligence to be shared with
Colombian or other foreign law enforcement agencies. In addition,
related individual investigations could be coordinated in such a way as
to maximize their effect on the overall system. Finally, the private
sector could be included by advising them at the most opportune moment
of the overall scheme, as well as the specific countries, foreign
banks, or particular accounts that are known to be involved in the
system.
The overall strategy could be designed to shake the confidence of
the illicit users of the system. On the one hand they would lose
confidence that the money they launder is safe and will be returned to
them. In addition the appropriate individuals involved could be passed
on for individual investigation not only in our country but also by
their own law enforcement as well. Those who maintain legitimate
businesses could find their ability to use the financial institutions
throughout the world hampered by their link to narcotics crime.
Providing the identity of the known users of the money laundering
system to the international press could further shame and deter future
use of the system. The final effect is to eliminate the market for BMPE
dollars in foreign exchange. Such a coordinated effort as part of an
overall strategy to attack a system of financial crime could begin to
impact the system itself rather than just chip away at the individuals
involved.
Mr. Chairman, thank you for allowing me this opportunity to express
my views. At the least, I hope my comments will foster debate directed
at more effective enforcement of systemic financial crime and more
efficient use of the tools available in our enforcement community.